July 29 (Bloomberg) -- Lloyds TSB Group Plc, the biggest bank that depends almost entirely on U.K. lending, may report its largest earnings decline in almost four years because of bad loans, credit-market writedowns and declining share prices.

Lloyds TSB probably will say tomorrow that first-half net income fell 43 percent to 881.1 million pounds ($1.75 billion) from a year earlier, according to the average estimate of eight analysts surveyed by Bloomberg. The London-based company may post 471 million pounds of credit losses and 618 million pounds of investment writedowns, analysts said.

Chief Executive Officer Eric Daniels largely sidestepped market-related losses in the second half of 2007, announcing 280 million pounds of writedowns, a fraction of what his counterparts at Royal Bank of Scotland Group Plc and Barclays Plc disclosed. An increase in loan defaults by U.K. companies and consumers may force Lloyds TSB to cut its full-year dividend and seek new capital, analysts at JPMorgan Cazenove Ltd. said.

``The dividend is unsustainable,'' London-based analysts led by Simon Pilkington wrote in a note to clients yesterday. JPMorgan Cazenove has an ``in line'' rating on the stock. ``We perceive a long-term challenge to the group's capital position, even without an economic downturn.''

The bank increased its dividend in 2007 for the first time in five years. The dividend yield is 11 percent, the most of any bank in the U.K., according to data compiled by Bloomberg.

Lloyds TSB rose 0.9 percent to 321 pence in London trading, valuing the lender at 18.5 billion pounds. The shares are down 32 percent this year, more than the 27 percent decline for the eight-member FTSE 350 Banks Index.

The Dividend

``If they don't increase the dividend, it will be seen as a signal by management that they don't believe they can grow earnings,'' said Leigh Goodwin, a London-based analyst at Fox-Pitt Kelton Ltd., who has an ``underperform'' rating on the shares.

Tim Tookey, Lloyds TSB's finance director, declined to comment on the dividend on a conference with reporters on May 6. The bank doesn't need to raise capital to fund its existing business, Tookey said at the time.

Lloyds TSB is considering overseas takeovers to reduce its dependence on the U.K. market, where it generates more than 95 percent of earnings. The company abandoned talks about a possible takeover of Allianz SE's Dresdner Bank or Deutsche Postbank AG in Germany, two people familiar with the matter said earlier this month.

`Defensive' Bank

The decision will help restore Lloyds TSB's status as ``the most defensive of the U.K. banks,'' Jason Napier, a London-based analyst at Deutsche Bank AG, said in a note to clients on July 17. Lloyds TSB is ``less open to swings'' from investment banking than its rivals, and ``we see substantial value in the share,'' he said.

Lloyds TSB's shares trade at 1.5 times book value, three times the multiple of HBOS Plc, the U.K.'s biggest mortgage lender, and the same as HSBC Holdings Plc, Europe's biggest bank, which makes more than half its money in fast-growing Asian markets.

Pretax earnings may also be hurt after the bank sold its closed life insurance and share register units last year. Lloyds TSB will also set aside 180 million pounds following a U.S. probe into past U.S. dollar payments.

Pretax earnings at Lloyds TSB's consumer unit, which accounts for 45 percent of profit, may rise 15 percent to 923 million pounds, according to the average of eight analysts estimates. Profit from corporate lending probably will fall more than 50 percent to 409 million pounds, the analysts said.

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net

Last Updated: July 29, 2008 12:49 EDT