HALIFAX is to buy back £1 billion of its shares over the next year - because it cannot find anything worth spending its £4 billion spare cash on.

The former building society, which converted in June issuing shares to 7.4m of its customers, yesterday announced a 15pc increase in pre-tax profits to £1.65 billion for the year to December. A dividend of 17.5p a share will be paid on May 11. For a typical Halifax customer who received 330 shares in last year's flotation, this means a payout of about £57.

Unlike the Woolwich, which made a special dividend to its shareholders to soak up some of its spare money, Halifax has chosen instead to buy back and cancel up to £1 billion of its shares.

Chairman Jon Foulds said: "The Halifax board is confident that a share buyback is the most appropriate remedy to the situation we find ourselves in and is in the best long-term interests of shareholders. We looked at all the options and concluded that a share buyback was the right one".

Mr. Foulds said that the Halifax had not ruled out spending some of its money on acquisitions, but was not willing to overpay: "If we can find an acquisition which is strategic and which is value enhancing for our shareholders then we would consider it. But there is a lot of froth about at the moment."

The share buy-back started yesterday and will continue over the year. The effect of the buy-back should be to enhance future dividends for shareholders, because dividend payouts will be divided between fewer shareholders.

Halifax had 7.6m shareholders at the time of its flotation and now has about 4m, with its original shareholders holding about two-thirds of its stock. Although Halifax's profits were roughly in line with analysts' expectations, underlying figures caused concern.

Last year Halifax had a net outflow of £615m in savings compared with an inflow of £2.3 billion in 1996. This is the first time ever that Halifax has suffered an outflow over a year.

Mike Blackburn, chief executive of Halifax, said it was expecting an outflow of savings, with customers moving their money after getting their bonus shares and indeed the outflow was "at the better end of expectations".

He admitted that the Halifax could not ignore competition from the new banks, including the supermarkets which are beating it on interest rates, but said that rates were not the only consideration for customers.

The conversion was also blamed in the dramatic fall in Halifax's share of net mortgage lending last year which tumbled from 11pc in 1996 to 6pc. Its share of all outstanding mortgages fell marginally from 20pc to 19pc. Mr Blackburn said the fall in net lending was "primarily conversion related. Over the medium- to long-term, the net share will come back".

The costs of conversion was £71m. However, the £800m acquisition of Clerical Medical in 1996 was beneficial, tripling profits on long-term savings to £129m. Halifax intends to cut its costs further by shutting 67 more branches this year to reach its target of 830 by December. Analyst James Johnson, of Credit Lyonnais Laing, said the results were in line with expectations and "at current prices Halifax shares are a sell". Halifax shares closed at 952p, down 25p.