Lloyds TSB profits climb 6% despite credit crisis

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The Independent Online

Lloyds TSB took a swipe at its "product-led" rivals as it unveiled a 6 per cent increase in annual profits yesterday, predicting that its customer-driven business would flourish through the economic downturn.

Eric Daniels, the chief executive, said the bank's focus on servicing customers' needs gave it lower costs for new sales, lower bad debts and steadier income than banks which relied on devising snazzy products. "They [competitors] will do what they will do," he said. "With a product-led strategy, you try to invent a better mousetrap and you go out and try to get people to buy it. When you have good times [with a product strategy] you have very good times; when you have bad times it is miserable."

Lloyds' underlying pre-tax profit for 2007 rose 6 per cent to £3.92bn, despite a £280m write-down on credit-related assets – much higher the £201m figure it had predicted late last year. The bank also said it might have to write off £155m over the potential downgrade of the monoline insurer MBIA. However, the damage inflicted on Lloyds is less than that suffered by rivals such as Barclays, which was at the forefront of creating and trading structured credit products.

The bank's growth was fuelled by its retail arm, which increased its profit by 17 per cent to £1.73bn, excluding a £76m charge for refunding overdraft fees to customers. The division added more than 1 million new current accounts and increased savings balances by 11 per cent.

Lloyds predicted an economic slowdown for Britain but no recession, with house prices staying broadly flat. The bank's chairman Sir Victor Blank said: "We think that [our business model] will not just withstand a downturn but will continue to grow through it."

Lloyds' shares rose by 4.75 per cent yesterday, making the bank the second-best performer on the FTSE 100 behind its rival Alliance & Leicester. Mr Daniels said Lloyds could take advantage of battered valuations by making acquisitions. It nearly bought Northern Rock in September but was unwilling to do so without liquidity support from the Bank of England.

Shares in Alliance & Leicester – a potential target for Lloyds if regulators approve – jumped by more than 6 per cent. Mr Daniels said the Treasury had assured Lloyds that Northern Rock would not use its new nationalised status to compete unfairly with other banks. "We believe them so we'll see how it goes," he added.

It is a long time since Lloyds was in such favour with investors. The darling of the banking sector throughout the 1990s languished for most of this decade amid doubts over its growth prospects and dividend. But Lloyds is the best-performing UK bank stock this year and it increased its 2007 dividend by 5 per cent to 35.9p a share after freezing the payout for five years.

Mr Daniels said he expected Lloyds to increase its share of mortgages this year as the market becomes more profitable. He criticised 125 per cent mortgages as "not acceptable" and said he did not believe in letting borrowers certify their own earnings.

Britain's banks are revealing their first audited accounts since the credit crunch started last summer. Royal Bank of Scotland is set to rebuff concerns about its capital position and stress its earnings potential when it unveils its results on Thursday.

Sir Fred Goodwin, the bank's chief executive, is expected to repeat guidance he gave in Dec-ember that the bank is comfortable with its capital ratios. Like Barclays on Tuesday, Sir Fred will stress the quality of RBS's assets to calm concerns about further writedowns.

He will also seek to shift the focus of investors from capital and writedowns to earnings pot-ential by outlining opportunities presented by RBS's acquisition of ABN Amro's wholesale banking platform and emerging markets businesses.