Lloyds TSB prepares to resume dividend in 2009

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Lloyds TSB claimed victory yesterday in its tussle with the Government over whether it could pay dividends to ordinary shareholders while receiving backing from the state.

Under the terms of last month's Treasury rescue plan, banks which receive capital injections from the Government cannot pay dividends to ordinary shareholders while the state holds preference shares with a term of five years. Lloyds has come under pressure from investors over the non-payment of dividends, casting doubt on the Government-brokered takeover of Halifax Bank of Scotland by Lloyds.

Lloyds TSB's chief executive, Eric Daniels, said: "[The] Treasury has stated we can resume paying dividends ... once we have eliminated those preference shares." The bank's board was confident that the preference shares could be repaid next year, he added.

Yesterday, the Treasury insisted that the terms of its support for the banks' share sales were unchanged and any early repayment of preference shares would have to be in taxpayers' interests.

Mr Daniels said the Government was a "value-oriented shareholder" and the removal of doubt about the dividend would allow the combined bank's share price to rise, increasing returns for taxpayers. "We feel pretty good about [the] Government being on our share register," he added. "I am not particularly concerned if they are on the register or not."

Lloyds said it could repay the preference shares through disposals of businesses or assets, retained earnings, raising replacement capital from other investors or restructuring existing capital. The Financial Services Authority might also reduce the capital ratios that banks have to hold once confidence has been restored to the financial system, the bank claimed.

"The FSA's capital requirements will move over time," Mr Daniels said. "What they are looking for at the moment is a bit of shock and awe. They want banks to appear incredibly well capitalised to restore confidence in the marketplace." But some experts questioned whether Lloyds would be able to repay the preference shares next year and why the FSA would relax its capital requirements with the economy plunging into recession. "We find this very curious," said one analyst at NCB. "We assume Lloyds must have had the blessing of the FSA to put this in the presentation but in our view it looks premature to talk about this, given that the UK is on the precipice of a potentially very severe recession."

Both banks released trading statements yesterday revealing increased losses in their corporate banking units. HBOS said it took a £5.2bn hit from toxic assets and bad loans in the first nine months of the year, an increase of £2.7bn during the third quarter. Lloyds said it suffered "a substantial reduction" in pre-tax profit over the same period from asset writedowns, falling prices of insurance assets and rising corporate bad debts.

Lloyds said examination of HBOS's books had identified another £10bn capital hit including £3.8bn of fair value adjustments crystallised on the deal. Further losses would come from applying Lloyds' more conservative valuation criteria on HBOS assets, and would be largely offset by positive adjustments on debt carried, Lloyds said.

Yesterday, Lloyds wrote to shareholders setting out the terms of the HBOS takeover and its £5.5bn capital raising. Lloyds said the FSA would have made it raise £7bn without the HBOS deal and that the lower figure reflected cost savings from the tie-up that would go into Lloyds' coffers.

The £4.5bn sale of ordinary shares will be underwritten by the Government, with existing investors getting first refusal. Mr Daniels said that,with the dividend question settled, he expected a good take-up from existing investors and that the Government's stake in the combined bank would probably be modest.

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