The society will have the largest shareholder register in the UK when its 8.5 million members each receive an estimated average of pounds 1,300 in free shares in the pounds 12bn flotation that will result in Halifax becoming a bank. Halifax's strong financial position means that they could be in line for further bonus payouts after the flotation, provided they remain investors.
Roger Boyes, Halifax's group finance director, said yesterday that the use of the excess money was an urgent matter. "But, we're not going to knee-jerk on it," he said.
"We have not ruled out repatriating capital to shareholders," Mr Boyes said. But he stressed this did not imply that Halifax would definitely return capital to shareholders after the flotation. He pointed to alternative ways to use the money, such as making acquisitions, developing existing business or starting up businesses.
Mr Boyes refused to disclose the precise amount of excess capital Halifax will have after its flotation but analysts calculate that the sum could easily amount to pounds 3bn.
Their calculations are based on the fact that Halifax has a "tier-one" capital ratio of 14 per cent. The Bank of England requires banks to maintain a ratio of 4 per cent but in practice most banks operate with capital ratios well above this level. Most high street banks have ratios between 6 and 8 per cent.
At 31 December 1996, Halifax had pounds 6.87bn of tier-one capital, which is in essence its reserves. It could function easily with half this amount of capital and still conform with its banking rivals.
"The question now, the $64,000 question, is what do we do with this ... It has to be put to work," Mr Boyes said.
When Halifax becomes a bank it will come under pressure to produce the best possible returns for shareholders. In the past, it has put its excess capital into its reserves while its banking rivals have redistributed surplus cash to shareholders.
"Our strategy is to put this capital to good use," Mr Boyes said.
Halifax yesterday reported pre-tax profits, before exceptionals, of pounds 1.43bn in 1996, a rise of 6.6 per cent.
Mike Blackburn, chief executive of Halifax, said the society had restructured its senior management to reflect its main line of businesses.
"We intend to be one of the winners in what will be an overcrowded marketplace," he said.
The society took a 16 per cent of share, or pounds 11.5bn, of gross mortgage lending last year. This is less than its more traditional 20 per cent share of the mortgage market.
Mr Blackburn said pricing of mortgage offers had returned to more acceptable levels last year, although Halifax still spent pounds 626m in offering cash- backs and discounts to borrowers.
Unlike many other mortgage lenders, Halifax accounts for the incentives in the year in which they are incurred. It said since 1994/5 its profits had been reduced by pounds 472m as a result of this accounting policy.
Aside from the core mortgage business, the society took an 8 per cent share of the new current accounts opened in the UK last year. It now has more than 1.6 million current account holders, a rise of 28 per cent during the year.
Halifax took an exceptional charge last year of pounds 153m to cover the cost of its conversion to a bank and a charge of pounds 298m to cover the costs of its integration and merger with Leeds Permanent. The total cost of that merger was pounds 331m as pounds 33m of costs were taken in 1995.
Since the merger, Halifax has reduced the number of branches and cut 1,200 head office jobs. It has also created 1,000 jobs in other business areas.
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