* 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.
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)