Lloyds TSB became the latest victim of panic over banks' capital cushions yesterday when a £585 million credit crunch hit made it the FTSE 100's biggest faller.

One analyst warned investors that the bank could be forced to halve its dividend and tap shareholders for £3.3 billion if a recession caused an increase in bad debts. Shares in Lloyds TSB closed down 4.7 per cent at 306p.

The bank announced a £505 million decline in the value of its insurance investment portfolio and £269 million in one-off policyholder tax payments. Lloyds TSB confirmed that it would take a £180 million hit when it settled a case brought by US regulators over payments to blacklisted countries such as Iran and Cuba. As a result the pre-tax profit fell 70 per cent to £599 million for the six months to June 30. Without these one-off items, some of which are reversible, profit was down by 19 per cent to £1.5 billion.

Eric Daniels, Lloyds TSB's chief executive, described the business as robust despite the troubled markets.

Analysts said that the hits to profits, albeit temporary, had ignited concerns about capital ratios. Lloyds TSB said it had a core equity tier 1 ratio - a measure of financial strength - of 6.2 per cent. However, analysts said that the various hits announced yesterday had pushed the bank down to about 4.9 per cent.

HBOS and Royal Bank of Scotland recently raised billions of pounds to boost their ratios to more than 6per cent. Concern about the prospect that Lloyds TSB might also call on shareholders for cash sent investors fleeing.

Alex Potter, analyst at Collins Stewart, said that Lloyds TSB's capital base was still appropriate for the bank's defensive balance sheet, particularly given that some of the impairments announced yesterday were temporary.

Michael Helsby of Morgan Stanley said that a recession could force Lloyds TSB to cut its dividend by 50 per cent and raise £3.3 billion of capital to maintain a 6 per cent ratio.

Lloyds TSB also worried investors by increasing its estimate of house price falls this year from 10 per cent to up to 15 per cent, with a further 5 per cent to be lopped off prices next year. The bank said three-month arrears were up 3 per cent compared with last year.

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