Lloyds Banking Group is expected to say the cost of compensating customers mis-sold loan insurance will be far higher than previously thought when it reports third-quarter results on Thursday.
Britain's biggest retail bank has already set aside 4.3 billion pounds to repay customers wrongly sold payment protection insurance (PPI), far higher than rivals as it had the biggest share of the PPI market.
Analysts say the final figure could rise by as much as 2.3 billion pounds.
The issue threatens to overshadow Chief Executive Antonio Horta-Osorio's success in turning around the bank's performance following a bailout in 2008 which left it 40 percent state-owned.
Lloyds has reduced its loan book, cut costs and reined in bad debts as part of a recovery plan and the rate of the bank's progress has led to optimism it could restore dividend payments in 2014.
However, that is expected to be determined by the outcome of discussions with Britain's financial regulator and upon clarity over new capital requirements for banks to be implemented by European regulators.
Citi analysts expect Lloyds to make an underlying pretax profit of 685 million pounds while Deutsche Bank is forecasting an underlying pretax profit of 531 million pounds, up from 419 million in the same period the year before.
The bank, which has more than 30 million customers and was a sponsor of the London Olympic Games, made an underlying pretax profit of 1.06 billion pounds in the first half, up 715 million pounds on the previous year.
Lloyds shares remain well below the 63 pence level at which Britain acquired its stake in the bank, however. They closed on Wednesday at 40.575 pence, meaning the taxpayer is sitting on a loss of over 8 billion pounds.
The rising cost of PPI compensation continues to weigh on investor sentiment and the bank could also face costs to compensate small firms sold complex interest rate swaps although it has so far said this will not be material.
Rival Barclays on Wednesday confirmed it had increased the amount it had set aside to deal with claims by 700 million pounds to 2 billion pounds and the industry could face an overall bill of up to 15 billion pounds.
Lloyds was saddled with billions of pounds of losses after buying troubled rival HBOS at the height of the 2008 crisis, in a deal that was brokered by the Labour government of the time.
(Reporting by Matt Scuffham; Editing by Mike Nesbit)