THE owner of Bank of Scotland has been dealt a blow to its hopes of putting the costly PPI (payment protection insurance) scandal behind it after it was forced to make a further hefty provision for potential claims.

Britain’s biggest mortgage lender, which has paid out more in PPI compensation than any other major UK bank, said a higher than expected surge in PPI information requests (PIRs) before the August 29 deadline has led it to set aside up to a further £1.8 billion to deal with the scandal.

It lifts the total amount Lloyds Banking Group has provided for PPI claims to nearly £22bn.

And the uncertainty over the final PPI outcome has led the bank to suspend the remainder of its share buyback programme for this year. The bank, which noted that its capital build and return on tangible equity would now be lower for the year, said around £600 million of the £1.75bn programme is expected to be unused at mid-September.

READ MORE: Clydesdale value falls by £430m as PPI bites

Analysts warned the extra provision could hit profits and dividends at the bank.

George Salmon, equity analyst at Hargreaves Lansdown said: “Suspending the buyback is unwelcome, but investors can at least take some comfort in the fact that with the deadline for new claims now passed the whole sorry saga should now be behind the bank. Looking ahead, the potential disruption of a no-deal Brexit likely remains the biggest threat.”

PPI was typically sold to consumers alongside mortgages, credit cards and loans to ensure they could continue to make payments if they fell ill or out of work. But it has been found the product was sold incorrectly in many instances. UK lenders had shelled out around £36bn in PPI claims by the end of June this year.

The claims deadline set by the Financial Conduct Authority (FCA) resulted in banks being deluged with PPI information requests during August, leading lenders such as Royal Bank of Scotland and CYBG to significantly increase their claims provisions in recent days.

READ MORE: PPI costs soar for Scottish lenders after last minute surge in claims

Lloyds reported a PPI charge of £650 million for the first half of 2019, causing interim profits to fall short of forecasts, with an unutilised provision of £1.083bn relating to complaints and associated administration costs.

However,  it received a “higher than expected” 600,000 to 800,000 PIRs per week in the final month before the deadline, which it said was “well above the previous assumption”.

Taken alongside an increase in direct complaints, including from the Official Receiver acting on behalf of insolvent customers, the bank said it would have to make an incremental charge for PPI claims in the range of £1.2bn to £1.8bn in its third quarter management statement.

Mr Salmon added: “At the half year stage, Lloyds had an unused provision of £1.1bn and the uptick in claims in the last few months has not only chewed through that, it’s added another £1.2bn-£1.8bn to the bill. That’ll limit reported profits and capital build – hence the decision to suspend the buyback."

READ MORE: Lloyds takes massive hit for late PPI claims

However, while Lloyds reported an increase in the volume of complaints, it noted that the quality continues to be low. “The group continues to process PIRs and the final provision could be above or below the range provided,” the bank added.

Fiona Cincotta, senior market analyst at spread-betting firm City Index, said: “This is a painful sting in the PPI tail for Lloyds, which had already suffered heavy financial punishment for being the worst offending bank in this sorry scandal.”

Ms Cincotta added: “Pulling the plug midway through a share buyback is a major embarrassment for company management, who have seriously misjudged the extent of the damage. The higher claims costs will also put pressure on profits and ultimately the dividend, but we’ll have to wait until later to see exactly how much.

“About the only good thing that can be said today is that a line is being drawn under this issue, presuming, of course, that Lloyds and the other British banks have learned their lesson.”

Lloyds said it continues to “target a progressive and sustainable ordinary dividend”.

Shares edged up 0.14p to 50.18p.