AGGRESSIVE selling at Lloyds and Halifax Bank of Scotland in the past and sometimes "fraudulent" compensation bids by claims management firms have been blamed by Lloyds Banking Group chief executive Antonio Horta-Osorio for a £375 million hike in its provision for payment protection insurance mis-selling compensation.

Lloyds, which is 41% owned by the taxpayer, has now put £3.6 billion aside for PPI claims as the bank followed Barclays in increasing its compensation pool after a jump in claims in February and March.

While characterising the increase as a "minor adjustment", Mr Horta-Osorio said the selling of PPI was "unacceptable".

"I think both Lloyds and HBOS have both sold this product far too long and with a significant intensity," he said.

Lloyds TSB acquired Edinburgh-based HBOS in a rescue takeover in 2008.

Mr Horta-Osorio called for a cultural shift in the industry, citing bank charges, endowment policies and the sale of interest rate swaps to small companies as examples of bad practice.

He said: "In my opinion the UK retail market has traditionally had a low cost of income not because it was an efficient market but because it had abnormally high revenues which were disguising costs that were not efficient and I think that model has to change."

But Mr Horta-Osorio also put some of the blame for the compensation increase on claims management companies, with 15% of the money earmarked for PPI claims eaten up in administration costs. He said: "What we see is 25%, one in four claims, from CMCs [claim management companies] didn't even have a PPI policy with us."

He added: "We have to stop this because this is fraud."

Mr Horta-Osorio did not rule out a further increase in Lloyds' PPI compensation pot.

Having clawed back a portion of past bonuses from executives after taking the initial hit from PPI, Mr Horta-Osorio said the Lloyds board would decide whether to recoup more money at the end of the year.

Lloyds made a first quarter statutory pre-tax profit of £288 mil-lion, down from £316m in the previous quarter but beating market expectations. A year ago the PPI provision meant Lloyds recorded a £3.4bn loss.

A 7% reduction in costs and a 36% fall in the impairment charge on troubled loans to £1.7bn offset a 15% fall in income to £4.5bn during the quarter.

Investec analyst Ian Gordon said: "In the recent past, financial updates from Lloyds often sounded like a desperate plea for help – but no more."

Paul Mumford, senior investment manager at Cavendish Asset Management, said: "These results are mixed, and will no doubt lead to some negative headlines, but the overall picture remains a broadly positive one with good progress being made."

Investors responded by sending Lloyds's shares up 1.39p or 4.5% to 32.4p.

The break-even price for the Government's stake is 73.6p.

Mr Horta-Osorio said he "absolutely" ruled out a sale of Lloyds' Edinburgh-based insurance arm Scottish Widows.

However, in an interview with news agency Reuters yesterday, Edmund Truell, founder of private equity firm Duke Street, said he is considering a bid for the business, and for Royal Bank of Scotland's Direct Line insurance arm, through his new vehicle Tungsten. Lloyds has hired Cathy Turner from Barclays as chief administrative officer as Mr Horta-Osorio revamps the management structure after taking a strress-related leave of absence at the end of last year.

Mr Horta-Osorio blamed an increase in the standard variable rate on its mortgages on high funding costs.

Funding costs could rise further if ratings agency Moody's proceeds with a reported intention to downgrade the company from A1 to A3.

Mr Horta-Osorio also insisted the bank is still on track to sell its Verde portfolio of 632 branches by a deadline of November 2013 set by European competition officials.

Co-operative Group is its preferred bidder for the business, which includes the 185-strong Lloyds TSB Scotland branch network, but last week Lloyds said it is no longer in exclusive talks with the mutual and has resumed talks with start-up bank NBNK.

Mr Horta-Osorio said Lloyds is taking the renewed interest from NBNK "very seriously". He said any NBNK bid had to show it could meet regulatory requirements and provide value to shareholders.

Lloyds continues to develop parallel plans for a flotation of the business on the stock market.

The giant said it had expanded its net lending to small and medium-sized enterprises by 4% year on year as the market contracted by 4%.

It advanced £3.25bn of gross new lending to smaller companies during the period.

Mr Horta-Osorio said he hoped to "significantly grow" Lloyds' share of the small business market.