Britain's Lloyds Banking Group said it would set aside another £375m sterling to cover compensation for people mis-sold insurance.
This offset a drop in bad loans and weighed on its quarterly profits.
Lloyds is 40% owned by the UK government after a bail-out during the financial crisis.
It said the increased provision reflected a rise in the volume of complaints received in February and March.
It adds to a £3.2 billion provision last year, which analysts had thought was conservative, and follows an increase in provisions by rival Barclays last week.
Lloyds made a first-quarter statutory pretax profit of £288m, down from £316m in the previous quarter and a loss of £3.5 billion in the first quarter of 2011.
Lloyds last week said it may start talks with new banking venture NBNK about its planned sale of 632 branches after an exclusivity period with The Co-op ended. It also continues to consider an initial public offering for the branches.
"At the moment we have three options on the table," Lloyds CEO Antonio Horta-Osorio said. He ruled out the sale of its insurance arm Scottish Widows.
The bank said its bad debts fell 36% from a year ago to £1.7 billion and the bank cut its non-core assets by £12.4 billion in the quarter, shrinking its bad loans faster than expected.
Loans as a percentage of deposits fell to 130% at the end of March, from 135% at the end of December, and the bank said it had reduced its target to 120%.
Excluding the effects of liability management, volatile items and asset sales, it made a pretax profit of £543m, compared with £661m the year before.
Lloyds, which includes the Halifax, was pushed to a £3.5 billion loss in 2011 by the PPI mis-selling scandal, leaving taxpayers wondering when they will get their money back. CEO Antonio Horta Osorio announced thousands of job losses as part of his strategic review, as well as plans to sell off large parts of its international operations.
Lloyds said it now expects to hit targets for reducing its non-core assets in 2013, rather than 2014, as it disposed of several businesses in the period, such as its onshore Dubai business to HSBC. But this hit total income which declined 7% to £4.5 billion.
Lloyds cut its provision for bad debts to £1.7 billion, down 31% from the previous quarter, while its exposure to troubled euro zone countries Portugal, Ireland, Italy, Spain and Greece reduced 6% to £22.9 billion.
On Ireland, Lloyds noted that the rate of increase in newly impaired loans in Ireland has reduced. It said that 66.6% of the total Irish portfolio is now classified as impaired and provisions as a percentage of impaired Irish loans were 65.4% at the end of March 2012.
Lloyds formerly owned Halifax and Bank of Scotland (Ireland) here, but is in the process of winding down its Irish loan book.
