Lloyds has a decent first half

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Lloyds TSB announced first half results, a 70% fall in pre-tax profits. Yet, Lloyds’ management was confident enough to raise the dividend 2p a share to 11. 4p. This strikes me as completely out of touch with market conditions. In the midst of a credit crisis and on the back of a 70% fall in pre-tax profits and a prediction of more economic volatility to come, one does not raise dividends. Now is the time for banks to husband their cash.

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A few weeks ago, Wells Fargo did exactly the same in releasing their earnings in the US. Perhaps Lloyds and Wells Fargo are looking to signal a lack of financial distress to the marketplace in order to reap some short term rewards in terms of security or to take over a more distressed rival. There are plenty of better ways to do that.

All that said, Lloyds looks to be amongst the best performing banks in Europe along with Santander, BBVA, and Credit Suisse. Note, however, that Lloyds took more than $1 billion in writedowns associated with losses due to the credit crunch.

Shares in Lloyds TSB fell 4 per cent in early trading on Wednesday after the group kicked off the UK banking interim results with a warning that “we expect a lower level of growth in the UK economy which will impact our business”.

The bank announced a 70 per cent fall in reported pre-tax profits to £599m, as asset writedowns and volatility in its insurance business hit the figures. However, underlying profits were up 11 per cent to £2.158bn and the interim dividend rises by 2 per cent to 11.4p.

Eric Daniels, chief executive, said the dividend increase was “a very positive signal” at a time when other banks were asking shareholders for extra capital or paying dividends in shares rather than cash.

He said there were “no guarantees” that the final dividend would also be increased, but suggested the interim rise was a “good indication”.

Some analysts have been expecting Lloyds to cut its dividend – perhaps at the year-end – because of its heavy exposure to a slowing UK economy, which they expect will lead to higher impairment charges on both its retail and commercial lending.

But Sandy Chen, at Panmure Gordon, said the dividend rise “signals Lloyds’ intention to trade through this credit crunch”.

FT, 30 Jul 2008

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