CLYDESDALE Bank is likely to see its bill for payment protection insurance mis-selling rise to more than £1 billion before the end of this year.

Owner National Australia Bank confirmed its UK operations are “expected” to take a further PPI provision of between £290 million and £420m in the financial year to the end of September.

Clydesdale has already set aside £806m to deal with PPI and around £481m of that had been used by the end of March.

In a trading update for the third quarter of its financial year, covering the three months to the end of June, the bank said the latest provision is mainly driven by the costs of running its remediation programme and the impact of reviewing a number of cases it had previously ruled on.

Clydesdale was fined £20.7m in April this year by the Financial Conduct Authority for the mishandling of PPI complaints.

At the time the regulator said 42,200 complaints were unfairly rejected between May 2011 and July 2013 while up to 50,000 upheld cases may have received too little compensation.

PPI has already cost the UK banking industry in the region of £20bn.

On top of the additional PPI provision Clydesdale also expects to put aside between £60m and £80m for complex interest rate hedging business loans. It has already made a provision of £431m for those products.

NAB said it would provide a full update on the scale of the provisions when it reports annual results in October and added: “There continue to be a wide range of uncertain factors relevant to determining the total costs associated with conduct related matters.”

For the quarter NAB said its UK banking division saw a dip in cash earnings partly as result of the timing of the Financial Services Compensation Scheme levy as well as a comparison with a one-off pension scheme gain recorded in the prior year.

Asset quality was said to have improved in the period.

Clydesdale’s recently appointed chief executive David Duffy maintains that the bank remains well positioned for growth.

He said: "In the third quarter, we have had solid earnings and strong growth in mortgage lending and customer deposits.

“We continue to focus on delivering value and improved services to our customers by investing in new digital channels and the continued regeneration of our branch network.”

Mr Duffy, who joined in June from Allied Irish Banks, added: “I am pleased with our progress in all areas and Clydesdale Bank is positioned well to deliver on our growth ambitions."

Clydesdale said a new digital banking platform is moving closer to launching and is currently being tested by some customers.

NAB chief executive Andrew Thorburn confirmed he still wants to exit the UK market through a flotation of Clydesdale.

He said: ““We continue to make good progress addressing our legacy and low returning assets to enable greater focus on building a stronger Australian and New Zealand business. “Substantial progress has also been made on our intention to pursue a demerger and [initial public offering] of Clydesdale Bank over the last three months.”

The Prudential Regulation Authority has already asked NAB to provide £1.7 billion of capital support for Clydesdale so it can meet future legacy conduct costs if the flotation goes ahead.

The additional provisions announced, of between £350m and £500m in total, would be deducted from that £1.7bn figure.

Many market commentators expect NAB to confirm a timetable for Clydesdale’s flotation in October, following publication of its annual results. NAB has previously outlined plans to initially offer between 20 per cent and 30 per cent of Clydesdale depending on demand.

NAB said its third quarter cash earnings rose around nine per cent to A$1.75 billion.

Revenue grew four per cent helped by a legal settlement gain and the sale of UK real estate loans.

Charges for bad and doubtful debts dropped 15 per cent to A$193m mainly due to lower charges in Australian banking.