Halifax to make pounds 1.5bn handout

THE HALIFAX yesterday announced plans for a capital reconstruction that will enable it to hand pounds 1.5bn - roughly half its surplus capital - to shareholders while keeping its powder dry for further selective acquisitions in its core mortgage market. The move means its 3.6 million ordinary shareholders will receive an average payout of pounds 217 in June.

Jim Crosby, who took over from Mike Blackburn as chief executive last year, said the reconstruction would allow the group to "up the pace" at which it returned capital to shareholders, while providing a structure letting the group manage its banking and non-banking activities more efficiently. The move received a favourable response in the City, where Halifax shares rose 19.5p to 787.5p.

Mr Crosby insisted that the reduction in capital in no way comprised the group's ability to grow by acquisition. However, the capital repayment removes the immediate pressure from the City for Halifax to enter into a more far-reaching merger with a similar-sized clearing bank or insurance group.

Over the past year Halifax has been linked with Barclays Bank, the Prudential and Royal Bank of Scotland.

Mr Crosby, who was speaking for the first time in the City since becoming chief executive, insisted that the group had the strongest brand in financial services in the UK and that the priority should be the "vigorous development of the brand, coupled with a tight control of costs". Growth in operating expenses will be held at 3 per cent over the next two years.

Nothing should be ruled out, he said, but any deals would have to satisfy three criteria. "They should not weaken our resolve to develop our personal finance business; they should not inhibit our ability to build the Halifax brand; and we have to ask ourselves, do we really believe that the synergies being claimed can be delivered without damaging the business." He said: "These are not easy hurdles."

Mr Crosby said Halifax was setting a target of reducing its tier one capital ratio from 12.2 per cent to the 7 to 8 per cent range common to most banks within "two to three years".

The group would be seeking authorisation for further share buybacks. However, he said the preferred route was to get to that target "first and foremost by acquisitions". The group would be interested in picking up other mortgage lenders as and when they came available. However, he said none were available at the moment.

In the reconstruction, shareholders are to be given shares in a new holding company to be created above Halifax plc, on the basis of 37 new shares for each 40 existing Halifax shares currently held, together with 62p per share in cash.

The pounds 750m returned to shareholders last year by buying up shares in the market was not only the largest-ever operation of the kind, but it left the bulk of Halifax shareholders out in the cold.

News of the reconstruction took the sting out of what analysts said was a lacklustre set of profits. Halifax reported underlying profits before tax of pounds 1.77bn, a rise of 7 per cent on the previous year. A sharp improvement in sales in the second half enabled the group to maintain its share of the mortgage market at 16 per cent, despite a slump in the first half. The total dividend was up by 16 per cent to 20.25p.

"The market tends to have a kneejerk reaction to things like buybacks, but the numbers were not terribly good," said Rob Thomas at Warburg Dillon Read.