Lloyds TSB shareholders denied £1bn windfall

Lloyds TSB disappointed shareholders hoping for a £1bn windfall yesterday by saying it has decided not to hand back the cash it has raised from selling foreign businesses in 2003.

The City had been hoping for indications that Eric Daniels, the chief executive of the high street bank since last June, would implement a share buy-back worth up to £1bn, in an attempt to boost confidence in the group. However, the bank said as it released its results for 2003: "The board has decided not to implement a share buy-back programme."

Lloyds said it wanted to retain the cash on its balance sheet to "maintain the flexibility to make value-enhancing 'in-market' acquisitions".

The bank unveiled a 66 per cent jump in pre-tax profits in the 12 months to 31 December to £4.35bn, boosted by gains made on nearly £3bn of asset sales.

Stripping out the sales and the changes in the value of investments, Lloyds' profits slipped 4 per cent to £3.38bn. Lloyds' shares topped the FTSE 100 fallers' board, falling 12.5p to 442p.

Mr Daniels has said that selling off Lloyds' New Zealand business for £2.25bn and its Brazilian interests for £453m was not prompted by a need to bolster the bank's capital, an issue which has caused concern among investors. Instead, Mr Daniels said, the moves were an attempt to refocus Lloyds' strategy on being an UK-based lender.

Lloyds, which last year relieved investors when it chose not to slash its dividend, gave further comfort about its reserves yesterday. It said its life and pensions arm, Scottish Widows, would not be hit by the new "realistic solvency" rules governing life operations.

Fears grew that Lloyds would have to put aside money to increase its capital reserves after Abbey National revealed two weeks ago that it was reserving an extra £373m under the Financial Services Authority's new rules, which are being phased in this year.

Lloyds does not have to report to the City watchdog under the realistic basis until next year.

Mr Daniels, who is thought to have fallen out with his finance director, Philip Hampton, over Lloyds' dividend, said the bank was not "close to the edge" on its dividend but that no board could guarantee the future.

Mr Hampton is widely thought to have pressed for a cut in the dividend, which yields more than 7 per cent, the highest among Britain's major banks. Mr Hampton left Lloyds last month. He will be replaced by Helen Weir, the former finance director of the DIY group Kingfisher. Lloyds paid a dividend of 34.2p for 2003, unchanged on the previous year.

Lloyds, which became one of the most lost-cost operations in the banking sector in the 1980s and early 1990s, has in recent years struggled to boost revenues while keeping costs under control.

Yesterday it said it had managed to fulfil its aim of slowing the erosion of its margin, which slipped from 3.2 per cent to 3.04 per cent. Most of the UK's major banks are also seeing their profit margins squeezed by increased competition in the market, more pressure for better deals from consumers and intervention by the competition authorities.

In the retail bank - the part of the business that Mr Daniels is concentrating on most - pre-tax profits rose 21 per cent. However, that excluded a £200m provision to cover fraud discovered in the retail bank in the first half of the year. The bank said it had sorted out the problem in the first six months, and had not had to make extra provisions in the second half.

Analysts at Fox-Pitt, Kelton pointed to positive signs in the results, saying: "We believe the group has made full-year gains in market share in credit cards, personal loans, independent financial adviser life sales and deposits."

However, it highlighted the ongoing concerns about Lloyds' revenues, saying they were flat. "The 0 per cent growth is well below the sector average and, given a 1 per cent growth in costs, Lloyds reported a fall in operating profit. This type of delivery is clearly bad for sentiment," Fox-Pitt said.