TWO of Britain’s biggest banks, Barclays and Lloyds TSB, will this week attempt to lift the climate of fear surrounding Britain’s financial institutions by declaring an unexpected increase in dividend payments.

The pay-outs will provide a clear signal that both banks feel they have emerged from the worst of the sub-prime crisis. The payments will be bolstered by robust results from both groups.

It is in stark contrast to the carnage seen among investment banks on Wall Street and continental rivals. UBS, the Swiss bank, last week stunned the City by announcing more write-offs totalling $18 billion (£9 billion).

The spectre of huge write-offs among Britain’s banks has led to steep falls in their share prices in the past six months. In that time the market value of Barclays has fallen 40% to £28 billion and Lloyds by 30% to £22 billion. This has led to shares in Barclays now yielding 7.2% before the dividend rise and Lloyds shares yielding 8.4%, much more than the cost of money.

In its results on Tuesday, Barclays will admit to write-offs from its exposure to the sub-prime crisis totalling about £1.5 billion. But its pretax profits, which have been audited by Price Waterhouse Coopers and seen by the Financial Services Authority, will still nearly match record results from last year, which topped £7.1 billion.

As a result the dividend will be lifted by 10%. The tone of the statement, which will be issued by John Varley, the chief executive, could also surprise the City. While accepting the second half of the year has been tough, the business is still performing well.

Barclays Capital has seen a surge in business from foreign-exchange trading and equity derivatives. The bank will also reiterate its international expansion plans with the proposed acquisition of Russia’s Expobank. And bad loans are under control.

Similarly Lloyds will report a strong set of figures with analysts expecting pretax profits of about £4.4 billion. However, the big question will be whether the positive statements will be sufficient to lift the negative sentiment surrounding banks.

Most analysts believe that there are still more write-offs to come following the $150 billion that has so far been declared. Philip Finch, an analyst at UBS, is forecasting $40 billion to $120 billion more in collateralised debt obligations and sub-prime-related write-downs.

He said conduits and structured investment vehicles could face $50 billion in write-downs, while commercial mortgage-backed securities could see $18 billion more, and leveraged buyouts $15 billion.

Britain’s biggest institutional investors have warned bank chief executives that they must provide full disclosure on their exposure – they don’t want any more shocks.

One said: “The time has come where we absolutely need a period of vastly improved transparency in order to reestablish confidence in the banking sector. We have made it clear to bank executives that this reporting season is that time.

“We’ve got an extraordinary position where banks won’t lend to others because they don’t believe each other’s numbers.

The Association of British Insurers is also backing investor calls for transparency.

Bradford & Bingley has become one of the most unpopular companies on the stock market, with traders staking nearly £275m on its share price falling further. Last week its shares fell 27% to close on Friday at 176p.

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