British bank Lloyds took a shock 3.2 billion-pound ($5.3 billion) charge on Thursday to compensate consumers for mis-selling debt repayment insurance policies and also suffered another hit from Ireland's woes.

Lloyds, Europe's sixth biggest bank by market value, made the provision against payment protection insurance (PPI) complaints after British banks lost a court case on how policies were sold to millions of customers.
   
Investec analyst Gareth Hunt said the PPI charge was double what the market expected and could be bad news for other lenders embroiled in the saga.

"At least it is clear, we now know what the charge is and the bank can move forward, but it's definitely bigger than expected. It does suggest everyone else will share some of the same pain," said Hunt.

Shares in Lloyds, 41-percent government-owned, were down 4.8 percent at 55.24 pence by 0725 GMT. Barclays and RBS also fell, by 1 percent and 2 percent respectively.   

Losses from bad loans at Lloyds rose to 2.6 billion pounds in the first quarter, up from 2.4 billion a year ago but down from 3.8 billion in the previous quarter. It said the first quarter hit was 500 million pounds more than it expected, mainly due to Ireland, where its impairment charge reached 1.1 billion.   

The double blow from the insurance mis-selling provision and Ireland pushed Lloyds into a statutory loss of 3.5 billion pounds in the first quarter, down from a 721 million profit a year ago.

Britain's banks last month lost an appeal at the High Court aimed at thwarting new rules on how they should sell PPI. The competition watchdog has for years been probing possible mis-selling of PPI, which typically covers purchases paid for by instalments in the event of the buyer becoming sick or unemployed. There are about 12 million outstanding policies.   

Following talks with Britain's financial watchdog, Lloyds said there were "certain circumstances where customer contact and/or redress will be appropriate". It did not give more details on the scale of the possible compensation.
 
It will affect other banks and some overseas firms. Up to now the most conservative stance had come from Bank of America, which in October took a $592 million reserve related to possible PPI claims.   

Morgan Stanley analysts last year estimated banks could have to pay out 5.1 billion pounds in compensation to customers. - Reuters