Shares in British bank Lloyds TSB Group plc soared yesterday as a massive improvement in first-half returns, based on lower costs and higher income, made investors flock to buy. Lloyds shares closed up 50 1/2p on 736p sterling in heavy trading.

Lloyds chairman, Sir Brian Pitman, noting that the group had retained just over £800 million sterling in the first half alone for the expansion of the business, said it would prefer to spend surplus capital on a sizeable acquisition.

But he said that if the bank could not find a suitable target, which would add value for shareholders, the alternatives were to buy back shares or pay larger dividends.

"Our preference is to make more acquisitions to improve the bank's competitive position," Sir Brian said. "But we will not do so unless this would improve value to shareholders."

Asked to be more specific on acquisitions, Sir Brian would only say there were some possibilities but refused to name them, adding that any acquisition would have to be fairly sizeable to be worth doing. "We're not going to buy a company that will add £25 million to our profits. It's just not worth the bother," he said.

Asked if Lloyds would consider buying into investment banking, Sir Brian said: "Not a hope; I wouldn't touch it with a barge pole."

He added: "If we can't do an acquisition, we will distribute the surplus. We have to decide which is the most effective - a buyback of shares, or bigger dividends."

Lloyds TSB's pre-tax profit figure was within expectations at just over £1.5 billion sterling in the first half of 1997, but its dividend was higher than most in the market had expected at 5.3 pence per share against 4.2p a year ago. "They are a very strong set of figures," said BZW banking analyst, Mr Tim Sykes. "There was a fantastic performance on mortgages, interest margins and a wonderful return on equity." Lloyds TSB's return on equity figure, already very high at 34.8 per cent at the end of last year, jumped again to 40.4 per cent.

Lloyds saw its cost/income ratio drop significantly to 51.7 per cent from 57.7 per cent as internal cost controls and benefits of its merger with TSB began to come through. It said it still expected the latter to be at least £400 million sterling a year by 1999.

A rise in total income to £3.59 billion, or 7 per cent, came despite a further £50 million provision against payments the bank may have to make to customers who were mis-sold pensions. Its total provision for this now stands at £250 million sterling. On an economic profit basis - the difference between the earnings on the equity of a business and its cost - the results were even more positive, rising 75 per cent to £816 million. Lloyds said it would begin to sell its C&G mortgage brand through TSB branches as well as through branches of Lloyds in the second half of 1997.

Lloyds TSB is currently forecast to make pre-tax profit of over £3.1 billion for the full year.