Lloyds bank said it will take a £3.2bn provision to cover it for losses from the mis-selling of protection insurance and suffered another £1.1bn hit in Ireland.
The part-nationalised bank said it made the provision against payment protection insurance (PPI) complaints after UK banks last month lost a court case on how policies were sold to millions of customers.
After discussion with Britain's financial watchdog, Lloyds said "there are certain circumstances where customer contact and/or redress will be appropriate," even though there remains uncertainty. It could see rivals also make big provisions.
Lloyds will not be involved with any industry appeal against the ruling and its provision should "draw a line under the issue" for the bank, chief executive Antonio Horta-Osorio said.
Lloyds reported a statutory loss of £3.5bn in the first quarter, compared to a £721m profit a year ago. It said its pretax profit was £284m before the PPI provision and other one-off items.
Losses from bad loans rose to £2.6bn in the first quarter, up from £2.4bn a year ago but down from £3.8bn in the previous quarter. It said the first quarter hit was £500m more than it expected, mainly due to Ireland, where losses hit £1.1bn.
The bank said its net interest margin dipped to 2.07 per cent in the fist quarter, from 2.12 per cent in the previous quarter due to increased wholesale funding costs.
The government holds 41 per cent of Lloyds and has an 83 per cent holding in Royal Bank of Scotland after bailing out both banks with billions of pounds worth of taxpayers' money during the credit crisis.
City A.M. Reporter