Royal Bank of Scotland announced first quarter losses of £116 million today, and warned that the cost of compensating customers who were sold payment protection insurance (PPI) under false pretenses could have a "material" impact on the business.

The bank said it could not give a reliable estimate as to the amount of compensation it would need to pay. Lloyds Banking Group yesterday announced that it has earmarked a provisional £3.2 billion to settle such claims, with the figure having been approved by the Financial Services Authority.

The announcement of this year's first quarter losses dwarfs the figure of £5 million for the same period last year. Despite the negative news, the bank's stock price rose 3 per cent to 41.75p as it was revealed that RBS' core business made an operating profit of £2.1 billion - a 25 per cent increase on the previous quarter's figure.

The bank is currently in a five-year restructuring period, and the core business is expected to be the focal point of operations once this is completed.