Lloyds TSB said its underlying profits are on track to grow 11 percent this year but the British bank will take a 200 million pound ($405 million) hit from exposure to credit market problems.
Lloyds, Britain's fifth biggest bank, said on Monday it was firmly on track to deliver a good performance for the year and produce good economic growth, and remained confident in its earnings growth prospects over the next few years.
The bank said 2007 profits would be in line with analysts' expectations. It should report a pretax profit of 4.13 billion pounds this year, based on the average of a Reuters Estimates poll of 18 analysts, up from 3.71 billion in 2006.
By 1220 GMT Lloyds shares were up 3.1 percent at 503 pence, one of the biggest UK gainers, aided by optimism the dividend is safe or could rise on the back of its strong capital.
We don't see anything in the current market dislocation that would impact our dividend discussion, Helen Weir, Lloyds TSB's finance director, told reporters on a conference call, adding the decision will be made at the end of the year.
Lloyds raised its dividend in July for the first time in five years but since then the credit crunch and slowing UK economy and housing market have raised concern about the payout.
The stock appears a relatively safe haven in these markets, especially for yield investors lacking confidence in dividend expectations in the banks sector, said Alex Potter, analyst at Collins Stewart. We see very little chance of a dividend downgrade here.
The shares had dipped in early trading, alongside weakness across European bank stocks after Swiss bank UBS unveiled a shock $10 billion writedown.
Analysts said the Lloyds' writedown, an estimated 72 million pound charge for bank fee refunds this year and earnings dilution from asset sales, were also all slightly worse than expected but the capital position and positive trend in UK retail banking were supportive.
CORPORATE MARKETS HIT
Lloyds said its UK retail banking and insurance and investments units had continued the positive trends seen in the first half of this year, but wholesale banking had been affected by a credit market crunch in recent months.
It wrote down the value of its asset-backed securities collateralised debt obligations (CDOs) by 89 million pounds and the value of structured investment vehicle (SIV) capital notes by 22 million pounds. Its corporate markets' profit will also take a 90 million pound hit from a cut in the value of its trading portfolio.
The remaining exposure to areas seen as risky is 389 million pounds, which analysts said was modest.
Weir said the credit turmoil impact on corporate markets growth, where profits rose 23 percent in the first half, would be limited as over 70 percent of the growth had come from core relationship banking.
The writedowns would be more than offset by a significant profit on the sales of its Lloyds TSB Registrars and Abbey Life Assurance businesses, which had also boosted capital ratios.
But the sales would dilute profits after tax in the fourth quarter by about 20 million pounds, the bank said.
Lloyds said it expects to repatriate at least 1.2 billion pounds from its insurance arm Scottish Widows in the second half, up from 600 million in the first half and taking the total over 3.6 billion pounds in the last three years.
Group sales growth had been good and efficiency continued to improve, leaving revenue growth well ahead of cost growth and improving its cost/income ratio, the bank said.
An efficiency improvement programme should deliver net benefits of 140 million pounds this year, above the 125 million targeted. The insurance arm expects additional claims for flood damage to reach 110 million pounds this year.
Lloyds shares have dropped 15 percent this year, making it the third best performer in the battered UK bank sector .FTASX8350, which is down 18 percent in 2007. The drop has cut Lloyds' market value to just under 28 billion pounds. (Editing by Andrew Callus/Elizabeth Fullerton)