Halifax could hand pounds 3.5bn war chest to investors

Halifax yesterday said it had a war chest of pounds 3.5bn to spend on acquisitions, however the bank promised to hand back its surplus funds to shareholders if it was unable to make a purchase at a sensible price.

Mike Blackburn, chief executive, said Halifax was looking to expand its interests in long-term savings, pensions and general insurance to complement its dominant position in the mortgages and savings market. However, he warned that "we don't like to overpay in Yorkshire" and said deals would only be considered if they fitted strategically and enhanced shareholder value.

He professed "no philosophical hang-ups" about handing money back to shareholders and would be happy to do so if the price of acquisitions was not right. No timetable was given for making purchases.

In its first results announcement since floating at the beginning of June, the former building society reported a 9 per cent rise in profits but said there would be no dividend payout until May 1998.

Mr Blackburn warned that the more people speculated about an acquisition, the less likely it would be.

He admitted that prices in the financial sector had run ahead of themselves as investors attempted to pick the next victim of acquisition-hungry groups such as Halifax.

Describing the surplus capital as a reflection of past success, Mr Blackburn said he would like to see the ratio of Halifax's Tier 1 capital to its total assets fall from its currently high 14.6 per cent to around 7 per cent. That would put the company in line with the rest of the banking sector.

Using up excess funds would also result in Halifax being able to report a higher return on the capital it employs in its operations. During the first half a return of 14.6 per cent was achieved, but Jon Foulds, the chairman, said the underlying return, excluding unutilised capital, was a more impressive 27 per cent.

Profits in the first half of the year rose from pounds 737m to pounds 802m, benefiting from last year's acquisition of Clerical & Medical. The result was within expectations but after an early rise the shares closed 15.5p lower at 1410.5p. Due to the still-fluid state of the share register, as institutions build stakes from the cashed-in windfalls of former members, the first dividend, for the full year, will not be paid until next spring.

Halifax saw interest margins and spreads narrow in the first half compared to last year but net new mortgage lending more than doubled to pounds 1.19bn, representing a market share of around 10 per cent.

The new bank said 23 per cent of its shares were sold by members on the first day of trading with the amount held by financial institutions rising to 31 per cent by the end of July.

Mr Blackburn said the Halifax business had stood up well in the first half, given the disruption and amount of staff and management time devoted to the flotation.

He noted that its non-traditional business was now 25 per cent of its income, which he hoped to raise to one third within four to five years, and to half over 10 years.

Mr Blackburn said Halifax had put in an exceptional performance in net new mortgage lending, which more than doubled compared with the first half of last year.

He said UK house prices were expected to rise around 7 per cent nationally this year but noted that outside the buoyant London and South-east England market, prices were often rising much more slowly.