Lloyds TSB dodges crisis as shares rise

Britain's fifth-largest bank is a small player in investment banking and, under chief executive Eric Daniels, has nailed its colours firmly to the retail market. That helped push up profits by 6% last year to £3.92 billion with a relatively modest £280 million loss on its involvement in subprime-related investments.

The group said in December that such losses for the 10 months to October had come to £200 million, so the extra £80 million for the last two months of the year remains no more worrying than analysts had feared.

The loss was far less than the £1.6 billion revealed this week by Barclays. Daniels said the bank had "relatively limited exposure to assets affected by current capital market uncertainties".

He added: "Our prudent approach to risk ensured we experienced minimal impact from the US subprime fallout. We have a strong capital position, and this will support future growth of the business."

He also sounded surprisingly upbeat about the UK economy despite indications that it is slowing down, and the housing market could go into reverse. Lloyds write-offs on personal customers' bad debts and arrears on its mortgage book fell last year.

"The UK market is the world's second-largest economic profit pool for financial services, with high levels of household financial wealth," said Daniels. "It enjoys the lowest level of unemployment in the G7 economies and despite a likely slowdown in 2008, we are projecting a good mediumterm economic performance and strong, long-term savings growth."

Lloyds clearly benefited from the run on Northern Rock in September, with its own savings rising by 15% last year and the addition of a million new current accounts.

It also saw a modest fall of 1% in write-offs on retail accounts, with fewer customers seeking insolvency and better debt-collection methods. Daniels forecast that retail impairmentcharges for the first half of this year would be little changed from the same period last year.

The bank revealed that it has so far spent £76 million settling claims for unfair overdraft charges. These were suspended last August ahead of the recent court case between the banks and the Office of Fair Trading, in which the judge has yet to rule whether the charges were illegal. UK banks, which have so far paid out just £800 million in settlements, could face total bills of £4.7 billion.

Lloyds matched the most optimistic City forecasts with a 5% rise in its total dividend to 39.5p, which Daniels said reflected its confidence. But he added: "Going forward, the board expects to grow the dividend over time, whilst continuing to build dividend cover."

Analysts said that meant dividends are likely to rise more slowly than earnings. Lloyds shares, up 6¼p at 443p today, currently yield almost 8%.