... but Lloyds TSB escapes comparatively unscathed

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The Independent Online

Lloyds TSB regained some of its allure for investors yesterday as it gave an upbeat assessment of its prospects despite £200m of write-downs from the credit crunch.

Britain's biggest bank for personal current accounts wrote down investments in collateralised debt obligations (CDOs) by £89m and took a £22m hit on debt issued by structured investment vehicles (SIVs). Its corporate markets business also took a £90m write-down on trading assets.

Lloyds's remaining exposure to risky assets was 389m, which analysts said was relatively small compared with bigger rivals, who have played in the debt markets. For most of this decade, Lloyds has been seen as unattractive compared with rivals such as Barclays and HSBC, with their high-growth international and investment banking businesses. It was investors' favourite in the 1990s, but became viewed as land-locked in the UK with little to attract investors apart from its precariously high dividend yield.

But Helen Weir, Lloyds' finance director, said the bank was increasingly confident about its growth prospects as sales momentum in retail banking and insurance picked up, and prudent lending ensured bad debts remained stable. "At Lloyds, you won't see 20 per cent-plus earnings growth when things are relatively benign, but you won't see a similar downside when things get tougher," she said.

Mrs Weir said Lloyds' £11.8bn conduit fund, Cancara, was funding itself in the commercial paper markets where other banks' funds had struggled to sell debt. She said Lloyds had no plans to wind down the fund, which issues short-term, cheap debt backed by longer-dated securities and client receivables.

"The stock appears a relatively safe haven in these markets, especially for yield investors lacking confidence in dividend expectations in the banks sector," Alex Potter, an analyst at Collins Stewart, said.

After a period of capital strain, the bank increased its dividend for the first time in five years in July. Mrs Weir said she saw nothing in the current market turmoil that would stop the bank increasing the payout in the second half.

Lloyds TSB is known to have come close to buying Northern Rock in the days before the mortgage lender was forced to go to the Bank of England for emergency funding. Mrs Weir said Lloyds would not be tempted by Northern Rock, despite the fall in the Rock's share price.

"Northern Rock today is in a different place from three months ago. There has been a lot of damage done to the franchise and the business as a whole," she said.

Inter-bank lending rates continued to rise in the wake of UBS's extra write-downs, and as lenders hoarded cash before their financial year ends. Mrs Weir said Lloyds had reviewed its lending to other banks and had made changes to credit limits, but stressed this was in "five per cent rather than 95 per cent" of cases. Lack of lending between banks threatens the wider economy because if banks stockpile cash they will not be able to lend at affordable rates for investment or spending.

Mrs Weir said: "There needs to be a period of stability where confidence can be rebuilt and where there aren't further shocks to the system." She said it could take until banks report their full-year results in February and March before things started to unfreeze.

Lloyds TSB shares rose 3.4 per cent, making them the best performer of the UK's biggest banks, which all rose apart from HSBC, which was little changed. Analysts expect 2007 pre-tax profits of £4.13bn, up 11 per cent.

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