Solvency rules may force Lloyds TSB to slash size of share buy-back

Lloyds TSB might have to significantly scale down a possible £1bn payout to shareholders to bolster its insurance reserves under regulations being introduced by the Financial Services Authority.

Analysts at ING issued the warning yesterday, sending Lloyds' shares down 3 per cent to 447.75p, making it the worst performing bank on the stock market. The ING report came 24 hours after Abbey National revealed it had been forced to make a £373m provision to increase its reserves under the FSA's "realistic" solvency regulations, which are being phased in this year.

Bruce Packard, at ING, said of Lloyds: "We've lowered our expectations of a buyback from £1bn to £300m. This will have a dilutive effect on earnings, given the low return available on excess capital."

Alex Potter, at Lehman Brothers, also said Lloyds might find its capital under strain by the FSA's new solvency regime. He said while Lloyds had a "super profitable" retail business, it already had a massive commitment on its dividend payments.

Lloyds, which will unveil its 2003 results a week on Monday, last year relieved the City when it decided against cutting its dividend to preserve capital. The bank instead raised £2.25bn by selling its New Zealand assets in December, though Eric Daniels, Lloyds' chief executive, said the move was not motivated by a need to boost capital reserves.

Analysts had expected Lloyds to return £1bn of the money made on the deal to investors. Lloyds said it always maintained it would consider "various options" as to how to use the money. A Lloyds spokeswoman added that Lloyds' life and pensions business, which operates as Scottish Widows, "was one of the best capitalised life businesses, with a free asset ratio of 12.7 per cent at the half year."

Lloyds did not join others in the sector to apply for a waiver from the FSA last year when stock markets were very volatile, on the basis that its coffers were deep enough to absorb the shock. This means the bank will not have to disclose how its capital holds up under the new realistic basis until next year.