UPDATE 2-Lloyds profit slumps after PPI hit and bad loan surge

* Bank takes fresh 1.8 billion pounds PPI provision

* Bad loans rise by 15% to 371 mln stg

* Q3 income down 9% to 1.32 bln stg

* Chairman, COO to step down from roles
(Adds detail, shares)

By Iain Withers and Sinead Cruise

LONDON, Oct 31 (Reuters) - Lloyds Banking Group
came close to suffering a shock third-quarter pretax loss on
Thursday after an increase in bad loans and a fresh 1.8 billion
pounds ($2.3 billion) provision for mis-sold loan insurance
payouts.

Pretax profit of 50 million pounds fell short of a 163
million pound average analyst forecast as Britain's most costly
consumer banking scandal continued to haunt the bank.

As Britain's biggest mortgage lender, due in part to its
Halifax business, and a key source of finance for small
companies, Lloyds is seen as a bellwether for the UK economy,
and most exposed to shaky sentiment among business and household
borrowers unsettled by Britain's protracted exit from the EU.

Underlying profit of 1.82 billion pounds also missed
expectations after a 15% rise in impairments to 371 million
pounds, largely due to a specific corporate failure which Lloyds
declined to identify and lower used-car prices that hurt its
motor finance business.

Third-quarter income also disappointed, falling 6% to 4.2
billion pounds in part due to subdued commercial banking
activities.

But Chief Finance Officer William Chalmers said credit
conditions remained benign and the bank did not see any major
negative issues, based on internal warning indicators, although
investment activity was lower than typical.

Chalmers said he hoped the UK's general election in December
would ultimately resolve Brexit uncertainty and help settle
consumer and business nerves.

"I think uncertainty will hopefully come to an end over the
course of the next nine months, 12 months, be it what it may,
and we hope that will then ecourage more long-term investment
into the economy," he told reporters on a conference call.

CAPITAL PLANS

The fresh provision for mis-sold loan insurance or PPI
payouts topped a forecast of between 1.2 billion pounds and 1.8
billion, published last month, and followed a surge of
last-minute applications before a claims deadline in August.

That prompted the bank to suspend an eagerly-anticipated
share buyback programme.

While committed to the bank's ordinary dividend, Chalmers
said the question of returning excess capital to investors
remained a matter for the board at the end of the year.

Shares fell 2.3% in early trading, before falling further
down 2.6% by 0937 GMT.

PPI or payment protection insurance policies were sold
alongside a personal loan or mortgage to cover repayments if
borrowers fell ill or lost jobs, but many were unsuitable.

The deluge of PPI claims had already dented third-quarter
results for rivals RBS and Barclays, sending
the industry's final compensation bill above an estimated 50
billion pounds.

Lloyds said it was cutting costs faster than expected and
reduced its total costs target for the year by 100 million
pounds to 7.9 billion pounds.

Loans and advances to customers increased by 6.2 billion to
447.2 billion, with continued growth in the lender's open
mortgage book, small business lending and motor finance.

Net interest margin, a key measure of profitability,
remained in line with guidance at 2.88 percent.

The bank also announced a shake-up of its leadership team,
with Chairman Norman Blackwell retiring from the role at or
before the bank's 2021 annual meeting, while chief operating
officer Juan Colombas will step down in July.

($1 = 0.7727 pounds)

(Reporting by Iain Withers and Sinead Cruise
Editing by David Holmes)