LLOYDS Banking Group has extended its provision for PPI mis-selling claims by a further £600 million, with the additional charges causing full-year profits at the Bank of Scotland owner to fall short of City expectations.

A high-profile advertising campaign starring Arnold Schwarzenegger, shown to remind consumers of the PPI deadline, led to a surge in claims across the sector. Lloyds increased its provisions for 2017 to £1.65bn.

Analysts said the extra provision led to Lloyds’ profits for the year coming in below City forecasts. The bank reported a 24 per cent rise in statutory pre-tax profits to £5.3 billion, against the £5.7bn expected.

Shares closed down nearly three per cent at 69.72p.

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The results came on the same day Lloyds’ disclosed that chief executive Antonio Horta-Osorio received total remuneration of £6.4 million in 2017, up from £5.8m the year before.

Lloyds, which is Britain’s biggest high street lender, had set aside £1 billion for PPI claims in 2016. A final claims deadline of August 2019 has been set by the Financial Conduct Authority, with Lloyds expecting to make further provision between now and then.

Meantime, the Bank of England’s decision to increase the interest rate to 0.5 per cent in November – the first rise in around a decade – was credited with helping drive profits at the bank. One analyst suggested the prospect of a further rise in May, now widely anticipated, has appeared like an “oasis in the middle of the desert” for the banking sector.

Lloyds reported that its net interest margin, which is the difference between what it charges on loans and the interest paid on savings accounts, increased to 2.86 per cent, up from 2.71 per cent. That came amid what was hailed yesterday as “landmark” year for the bank, given its full return to private hands in May. It had received a £20.3bn bailout from taxpayers at the height of the financial crisis.

The bank’s turnaround was reflected in yesterday’s confirmation from Lloyds of a share buyback worth up to £1 billion, following press speculation.

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The bank announced a total ordinary dividend of 3.05p per share, up 20 per cent on 2016. It had resumed dividend payments before the Government sold off the last of its shareholding in the bank.

Laith Khalaf, analyst at stockbroker Hargreaves Lansdown, said: “There’s a lot to like in Lloyds’ numbers, with profits rising, costs under control, and prodigious amounts of cash being thrown off to shareholders.

“The Bank of England can take its fair share of credit for Lloyds’ profits, as rising interest rates have delivered a boost to the top line at Lloyds. For the banking industry, the prospect of rising rates after a decade of loose monetary policy is a bit like coming across an oasis in the middle of the desert. With more rate rises waiting in the wings, this looks like a tailwind that’s going to be blowing behind Lloyds for the foreseeable future.”

Alongside the share buyback, Lloyds’ said it will invest £3bn in the next phase of its digital strategy, which will include “transforming ways of working”. It did not say whether this would mean branch closures. Lloyds announced the closure of a further 49 branches in December, including 11 in Scotland. Bank of Scotland currently has 217 branches.

Mr Horta-Osorio said: “2017 has been a landmark year in which the Group has made significant strategic progress and returned to full private ownership. We have delivered another year of s t r ong f i n a nc i a l performance.”

The results came shortly after Lloyds’ Scottish Widows pension business pulled the plug on its £109bn asset management deal with Standard Life Aberdeen. The deal had been under review since Standard Life merged with A b e r d e e n A s s e t Management last year. It was later reported that talks aimed at merging Scottish Widows and Standard Life’s pension and life assurance business had broken down in December.

Lloyds aims to add more than one million new pension customers by 2020.

Scott Wright: Lloyds is leaving arch rival Royal trailing in its wake

Mr Khalaf said: “The government’s auto-enrolment programme is now largely in the rear view mirror, which means Lloyds will have to pinch these new customers off someone else.

One would expect Scottish Widows to play a pivotal role in this pensions land grab, which lends some context to the prospective withdrawal of £109bn of assets from Standard Life Aberdeen.”