BRITAIN'S new banks, the converted building societies, are so flush with cash that they could afford to hand back £1.7 billion to their shareholders this year.

Halifax, Woolwich and Alliance & Leicester are sitting on excess capital with a combined value of £5 billion, according to research published by Salomon Smith Barney, the US investment bank.

Salomon believes the three banks could comfortably return a third of this surplus during the 1997 financial year before running into problems with advance corporation tax. Distribution would be either through a share buyback or payment of a special dividend.

Salomon argues that the three converts must reduce their cash levels to the industry norm if they are to make optimum use of their assets. Two of the banks, Halifax and Woolwich, have already indicated they may return some of the surplus to shareholders.

"The excess capital can either be used to support growth - organic or by acquisition - or it can be returned to shareholders," Salomon says. It adds that it sees few opportunities to deploy current capital in existing business lines while the acquisition route involves risk.

Halifax, the UK's largest mortgage lender, has the biggest cash mountain. It could return an estimated £1.12 billion this year and double that amount in 1998. Alliance & Leicester has £357 million, while Woolwich has £211 million. Again, both banks would be able to return double that amount next year.

Shareholders in Woolwich are most likely to benefit from a share buyback or special dividend. John Stewart, chief executive, intends to present plans to return excess capital to shareholders at the bank's annual meeting on April 22.

Mike Blackburn, chief executive of the Halifax, has said he would have no qualms about a special dividend or share buyback in the absence of a suitable acquisition. But Alliance & Leicester says it would prefer to use its surplus to finance organic growth or an acquisition."