HBOS expects earnings growth to rise 7%

A recovery in its share of mortgage lending helped Halifax Bank of Scotland group to deliver 7% earnings growth this year, according to figures released on Wednesday by Britain's fourth-biggest bank.

The bank said its current trading and financial performance "remains robust" and it was comfortable with analysts' forecasts that 2006 underlying pre-tax profit would rise to £5.2bn from £4.8bn last year.

Mortgage lending dipped last year after the bank focused on its most profitable lines of business but a fall in market share to 11% proved more severe than expected. This year aggressive marketing and keen pricing helped the bank, the UK's biggest mortgage provider, which has a 22% share of the overall mortgage market, recover to grab 17% of all new mortgages sold.

HBOS said it was less exposed than rivals to bad debts from unsecured lending. Its credit quality and performance in each of its lending businesses was unchanged and its full-year bad debt charge was in line with expectations, it said. Analysts estimate the bad debt charge will rise to about £1.9bn from £1.6bn in 2005.

Banks' lending policies have come under scrutiny following the surge of credit, and in particular unsecured lending, in the last three years.

Intense competition has also squeezed margins. Banks have sought to boost earnings with sales of protection policies, which at Barclays and Lloyds TSB are estimated to account for more than 10% of overall profits. The investment bank Credit Suisse estimated that protection policies at Halifax boosted group profits by 8%. Concerns about the potential mis-selling and profiteering from these sales provoked an investigation by the Office of Fair Trading, which is still being carried out.

HBOS said on Wednesday that its appetite for unsecured lending remained deliberately restrained.

James Hamilton, an analyst at WestLB, said: "It all looks reasonably encouraging. To say at this stage they are comfortable with [full-year] consensus earnings indicates to me that the first-half performance is at the very least in line with expectations."

Analysts said the trading update was short on positive surprises and there was some disappointment that HBOS did not increase its 2006 share buyback programme from the £750m already promised. The bank said it had already repurchased £447m of shares, however, which analysts at Dresdner Kleinwort Wasserstein said left an increase in the buyback programme to £1bn looking "inevitable". It said a similar amount could be repurchased next year.

Dresdner added in a research note: "Some worry that HBOS has gone ex-growth - today's statement firmly refutes that charge. HBOS management has a clear, focused strategy, which offers several further years of organic growth in the UK, Ireland and Australia."