Lloyds predicts cull of banks

Sir Brian Pitman, chairman of Lloyds TSB, yesterday predicted the demise of the "mortgage" banks and pledged to be a participant in any mergers and acquisitions.

Speaking as the bank reported a 16% rise in pre-tax profits in the first half to £1.85bn, Sir Brian said weak players in the financial services market were tending to be mortgage banks, essentially the former building societies.

"Consolidation takes place when they don't feel strong," Sir Brian said.

Lloyds, which is in the process of buying mutual life insurance group Scottish Widows, is still on the hunt for further acquisitions.

Lloyds made 90% of its profits in Britain in the first half, fuelling its motivation to look for expansion opportunites in Europe. The bank will issue new shares if necessary to fund acquisitions.

"But the UK is just as important as Europe," Peter Ellwood, chief executive, said. "We're looking at banks, former building societies and insurance companies."

In the face of the treasury-backed Cruickshank investigation into the sector, Sir Peter insisted the market was competitive. "Oligopolies are disappearing, markets are opening up, barriers to entry are coming down," Sir Brian said.

He predicted that the new entrants such as Egg and Standard Life might not survive. "If all you do is sell on price you are not going to be a long-term winner. It's a combination of products and service."

The bank's shares gained 10.5p to 802p as it revealed further savings from the merger between Lloyds and TSB, and a 21% rise in the interim dividend to 8.1p.

It costs £9m a day to run Lloyds TSB, down from £10m, but the bank said it wanted to squeeze its costs lower. Mr Ellwood insisted that was unlikely to involve mass branch closures. The bank has 450 more branches than its nearest rival. It is on target to reach its goal of £400m of savings by the end of the year.

The bank's share of the mortgage market, through the C&G brand, fell to 7%, below its "natural" share of just under 10%. However, profitability of the business increased by 35% to £469m. The bank said it had decided to "maintain profitable growth rather than pursue market shares based on uneconomic pricing".

Overall, the bank made 71% of its profits from its British retail financial services arm, where profits reached £1.3bn, a rise of 17% if last year's £400m provision against pensions mis-selling is taken out.

In its insurance operation, Mr Ellwood admitted the performance of Abbey Life was "not exactly sparkling". It would be subject to triennial review at the start of next year. The City expects the brand to be phased out once the Scottish Widows acquisition is completed.

The bank's provisions against bad and doubtful debts increased by 18% to £315m, primarily as a result of centralising the lending books of Lloyds and TSB. While provisions in Britain rose, abroad they fell to £55m, largely due to the lower charge for the Losango consumer finance business in Brazil.

Sir Peter reiterated the bank's strategy of "selective market leadership", which led it to pulling out of its global custody operation, risking 1,000 jobs, earlier this month.

Unifi, the finance union, said: "These profits will be of little comfort for those who are losing their jobs. We feel it's time that the bank gives a commitment of job security to all staff who have contributed to these massive profits."