* Analysts expect Lloyds to set aside another 500 mln stg
* Provision would take total to 10.3 bln stg
* Lloyds expected to report 20 pct rise in H1 profit
By Matt Scuffham
LONDON, July 24 (Reuters) - Lloyds Banking Group is expected to set aside another 500 million pounds ($849 million) to compensate customers mis-sold loan insurance, bringing its total bill so far to over 10 billion pounds.
Analysts say Lloyds will detail the extra charge next Thursday alongside its first-half results, which are expected to show a 20 percent increase in underlying profit to 3.5 billion pounds ($6 billion).
British banks have set aside more than 20 billion pounds in total to compensate customers mis-sold payment protection insurance (PPI). The policies were meant to cover repayments if customers fell ill or lost their jobs but were often sold to people who did not need them or would be ineligible to claim.
Analysts at Deutsche Bank said that, by the end of last year, Lloyds had dealt with only 40 percent of customers who had been sold PPI since 2000, making it impractical to rule out further charges.
In a note previewing the results, Deutsche Bank forecasts a further 500 million pounds will be set aside by Lloyds in the second quarter, bringing its total bill to 10.3 billion pounds. Keefe, Bruyette & Woods analyst Mark Phin also expects Lloyds to take an additional PPI charge of 500 million pounds.
Like part-nationalised rival Royal Bank of Scotland, Lloyds is expected to say that it has benefited from improving economic conditions which are resulting in less borrowers having difficulty paying back loans.
However, also in common with RBS, its progress is being hindered by the fallout out from past misconduct. Lloyds is expected to be fined up to 300 million pounds next week following an investigation by U.S. and UK regulators into the alleged manipulation of the Libor benchmark interest rate.
Those factors threaten to overshadow a strong second-quarter performance that should strengthen Lloyds' case for re-starting dividends and boost the government's chances of selling its remaining shares before the next election in 2015.
Lloyds, which was one of the highest-dividend paying stocks in Britain before the financial crisis, has said it will apply to Britain's financial regulator to begin paying dividends again in the second half of the year.
The move is seen as key to the government's prospect of selling some of its remaining shares to retail investors, a commitment made by Finance Minister George Osborne.
The bank, which owns Bank of Scotland and is registered in Edinburgh, may reiterate potential risks it faces if Scots vote for independence from the rest of the United Kingdom in a September referendum. It has previously said that scenario would affect its cost of funding, taxes and compliance costs.
$1 = 0.5885 British Pounds Reporting by Matt Scuffham; Editing by Pravin Char