Lloyds TSB investors could see dividends paid next year

Lloyds chairman Sir Victor Blank injected the hope that the new bigger bank might be able to pay off part of the Government debt and so restart paying the dividends far more quickly that the City had originally thought.

He said this could now happen as early as next year if the bank can reach a deal with the Government and the Financial Services Authority.

When the original Government bail-out for the two banks and Royal Bank of Scotland was announced in the middle of last month it was assumed that the banks would not be allowed to pay cash dividends for as long as the Government held preference shares in them.

Those preference shares which pay 12% interest originally had a minimum life of five years. The enlarged bank will have £4 billion of preference shares issued to the Government.

But today Lloyds said the Treasury "had indicated its encouragement that the preference shares be repurchased as soon as practicable". It even set a price of 101% of the issue price for a repurchase in the next six months.

Lloyds chief executive Eric Daniels said he could foresee "various routes" to repaying the preference shares. These included paying them back through "other investors", likely to be code for bringing in cash from sovereign wealth funds like those in the Middle East. He also hinted at asset sales, saying that "managing the balance sheet" was another way of paying back the government's stake.

Lloyds added that the Government preference shares could be repurchased "using replacement Tier One capital, retained earnings, the proceeds of disposals, gross reductions in risk-weighted assets or as otherwise permitted by the Financial Services Authority."

The ban on the bailed-out banks paying dividends was part of the Government's demand in return for its capital. But it came as a major blow to Lloyds shareholders and particularly to HBOS's 2.1 million small shareholders who were given shares when Halifax came to the stock market just over 10 years ago.

Lloyds also spelled out just how imperative and urgent it is that the takeover of battered rival HBOS and the Government injection of £17 billion into the merged banks goes ahead.

It revealed that there could be up to another £10 billion of writedowns or losses at HBOS once the takeover goes through. It also said that the FSA would demand that it raise £7 billion in new capital if the takeover does not go through rather than the £5.5 billion it is raising with the deal. Lloyds increased the amount it expects to save through the takeover from £1 billion to at least £1.5 billion, although most analysts reckon it can save £2 billion.

Blank told Lloyds shareholders: "The acquisition of HBOS represents a compelling opportunity to accelerate Lloyds TSB's strategy and create the UK's leading financial services group."
Terms of the takeover deal are an all-share offer of 0.605 Lloyds shares for every one HBOS share.