Lloyds reports rise in third quarter profit but PPI still a drag

However, the group,which includes Bank of Scotland, set aside another £500m to compensate customers over the mis-selling of Payment Protection Insurance (PPI), although this was down from the £900m last year.

And the good news was further tempered by a higher-than-expected drop in underlying profits, despite a fall in costs.

Underlying profit fell eight per cent to £2bn, lower than consensus, which expected the figure to come in at £2.3bn.

Operating costs fell by two per cent to £1.91bn from £1.97bn for the three months to the end of September.

The lender reported underlying profit of £6.4bn for the first nine months of the year, up six per cent on the first nine months of 2014. Total income was flat at £13.2bn for the nine months to the end of September.

Operating costs for the nine months from January to the end of September were down one per cent at £6.069bn, “despite additional investment and simplification costs”.

Meanwhile, the bank reported that its balance sheet had further strengthened, with a common equity tier 1 ratio of 13.7 per cent and total capital ratio of 22.2 per cent.

Underlying profit slid to £1.97bn from £2.16bn a year ago after tougher trading conditions in commercial banking, the bank said, while harges for bad loans fell 33 per cent.

Net interest margin, a key profitability measure for Lloyds, rose to 2.64 per cent from 2.47 per cent.

The rate is the difference between money paid out to depositors and creditors and interest taken from loans.

The bank said the margin was likely to be about 2.63 per cent for the rest of the year, a superior rate to the 2.6 per cent previously estimated.

A tougher commercial banking environment sent the bank’s revenues down 4 per cent.

Lloyd’s share price was down 4.7 per cent at 73.7p in early trading on the results.

Chief executive Antonio Horta-Osorio said the bank continued to make “strong financial progress” over the first nine months of the year.

He added: “These results, coupled with our simple, low-risk, UK-focused business model, underpin our confidence in the group’s future prospects and our strategic direction.”

The bank also stated that it backed Chancellor George Osborne’s announcement earlier this month on the sale of around £2 billion of Lloyds shares to retail investors in the spring.

The UK government still owns a 12 per cent stake in Lloyds, which it bailed out at a cost of £20.5bn at the height of the financial crisis of 2008, and has said it plans to sell shares worth at least £2bn in the bank to private investors, as part of its plan to put the bank back in private hands.

The stock will be sold at a 5 per cent discount to the market price, and in a bid to avoid wealthier investors snapping up the lot, anyone applying for less than £1,000 worth will be prioritised.

Investors will be awarded a bonus share for every 10 purchased if they hold their investment for more than a year. This will be capped at £200 per investor.