Lloyds Banking Group Plc, Britain’s biggest mortgage lender, posted a third-quarter loss after setting aside an extra 1 billion pounds ($1.6 billion) to compensate clients mis-sold loan insurance.

The net loss narrowed to 361 million pounds from 501 million pounds in the year-earlier period, London-based Lloyds said today in a statement. Analysts had predicted a 4 million- pound profit, according to the median estimate of six surveyed by Bloomberg.

“We have made further significant progress this quarter, improving underlying performance in a challenging environment,” Chief Executive Officer Antonio Horta-Osorio, 48, said in the statement. “Disappointingly, legacy issues continue to affect our results.”

Lloyds had already earmarked 4.3 billion pounds, more than any other bank, to compensate clients who were forced to buy, or didn’t know they had bought insurance to cover their repayments on mortgages, credit and other loans. Barclays Plc, Britain’s second-biggest bank, said on Oct. 18 it would take an additional 700 million-pound charge for payment protection insurance.

Claims Settlement

U.K. banks have now set aside more than 10 billion pounds to settle claims after regulators ordered U.K. banks to compensate customers who bought payment protection insurance.

Barclays has provisioned 2 billion pounds for insurance redress, Royal Bank of Scotland Group Plc has earmarked 1.3 billion pounds, HSBC Holdings Plc (HSBA) 1.1 billion pounds and Santander U.K. about 731 million pounds.

RBS may need to post an extra 300 million pounds when it reports third-quarter earnings at 7 a.m. tomorrow, according to Gary Greenwood a banking analyst at Shore Capital in Liverpool. Greenwood had estimated that Lloyds would need an extra 2.3 billion pounds.

Claims-management companies, which help customers pursue compensation for a fee or percentage of any award, have inflated the cost of claims and more than half from some firms are bogus, Horta-Osorio said in July.

Lloyds shares have rebounded 57 percent to 40.58 pence in London trading this year, making it the best performer in the six-member FTSE 350 Banks Index. The Treasury, which owns about 40 percent of the bank after bailing it out in 2008, paid about 73.6 pence a share for its stake.

Lloyds’s profit margins are under pressure as the Bank of England holds its benchmark interest rate at a record low amid an anemic economic growth.

The net interest margin, the difference between what Lloyds earns on loans and its cost of funding, fell to 1.93 percent in the third quarter, from 2.05 percent in the three months to the end of September last year, the bank said. That missed the 1.94 percent estimate of Credit Suisse Group AG analysts led by London-based Carla Antunes da Silva. Horta-Osorio said in May the margin would narrow to less than 2 percent in 2012.

(Source: Bloomberg)