Lloyds Banking Group posted the negative results after it set aside Â£3.2 billion ($5.3 billion) in an attempt to compensate clients who were mis-sold insurance on loans.
In the first three months of the year, the institute experienced a net loss of Â£2.4 billion - a result markedly lower than the Â£169 million profit it posted at the same time a year earlier.
The payouts came after British banks lost a court bid to prevent rules over compensating customers being imposed by financial regulators.
Antonio Horta-Osorio, chief executive officer at Lloyds, said that "drawing a line under this issue" was in the long-term interest of the bank.
Last month, it emerged that Lloyds is to slash a further 325 jobs from its wholesale group operations as part of the organisation's integration with HBOS - a move that sees redundancies at the company since 2009 climb to 22,000.
By Tony Aynsley