US Job Stats Drive Market Stimulus 'Frenzy'

Stock markets endured a rollercoaster after the release of US employment figures - a crucial indicator on when the Federal Reserve will ease its economic stimulus.

US employers added 169,000 jobs in August and much fewer in July than previously thought, according to the official data.

The slowdown in hiring was initially seen as complicating the Federal Reserve's decision this month on whether to start slowing its monthly $85bn of bond purchases to boost the economy.

Fears over the so-called 'tapering' of asset purchases has gripped financial markets for months, reflecting the addiction to cheap credit in the world.

The Dow Jones industrial average rose on opening - alongside the FTSE 100 and other major European markets - but then fell back, closing with little change.

However the yield on the 10-year US Treasury note fell to 2.87% from 2.95% as investor expectations eased about the prospect of rising central bank interest rates.

The UK's 10 year debt yield - the interest rate the country pays to service its debts - also fell back from a two-year high to below 3%.

The US Labor Department said while the unemployment rate dropped to 7.3% in August, the lowest in nearly five years, it fell because more Americans stopped looking for work and were no longer counted as unemployed.

The proportion of Americans working or looking for work fell to its lowest level in 35 years.

July's job gains were just 104,000, the fewest in more than a year and down from the previous estimate of 162,000.

Employers have added an average of 148,000 jobs in the past three months, well below the 12-month average of 184,000.

Market strategist at ETX Capital Ishaq Siddiqi said: "It's unwise to say tapering is off the cards in September but it definitely has given the Fed and the market food for thought."

Meanwhile, US oil prices closed at a two-year high of $110.53 a barrel amid fears of escalating tensions in the Middle East and hope for continued stimulus from the Fed. 

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Royal Mail To Pledge City Dividend Bonanza

By Mark Kleinman, City Editor

Royal Mail will pledge to pay hundreds of millions of pounds in dividends to City shareholders in an attempt to win private sector support for its £3bn privatisation, Sky News has learnt.

The company will make the promise as part of a Government statement announcing its intention to float the centuries-old postal operator on the London Stock Exchange, which is expected to be made towards the end of next week.

Sources close to the planned listing of Royal Mail said on Friday that the company was likely to commit to a specific shareholder payout for the current financial year, as well as a general intention to distribute up to about 50% of its profits in the form of dividends in subsequent years.

A valuation of £2.5bn - £3bn would see employees' stake worth up to £300m

The details are still being finalised and could yet change ahead of an announcement, one insider said.

Royal Mail's board is understood to have backed the dividend pledge in principle and is expected to meet next Wednesday to agree further details relating to the privatisation.

The dividend pledge is designed to reassure major City institutions about the attractiveness of Royal Mail as an investment proposition at a time when the threat of industrial action has again reared its head.

Postal operators in other European markets tend to pay out at least 40% of their earnings in dividends although Royal Mail would be expected to retain a large chunk of its future profits as it continues to invest in the modernisation of the company.

The share giveaway to staff will encompass 10% of Royal Mail's equity

"There will be an explicit and robust statement on the company's dividend policy, as you would expect," said a person close to Royal Mail.

However, the commitment on dividend payouts may also ignite further hostility from unions which have criticised the sell-off plans and accused ministers of transferring Royal Mail's economic value to the private sector while having nationalised its historic pension liabilities.

The Communication Workers Union (CWU) is preparing to hold a vote on national strikes at Royal Mail, saying it believed industrial action was "inevitable" without compromise from the company on issues including pay, jobs, pensions and the impact of any sell-off.

The Communication Workers Union is preparing to vote on national strikes

The union has been lobbying for a ten-year pay and conditions offer that would be underwritten by the Government.

The result of the ballot will be revealed in early October and the first strike could be held on October 10 if there is a vote in favour of industrial action.

A lack of progress settling the row could potentially lead to a dispute spilling into the festive season, Royal Mail's most profitable and crucial trading period.

The conflict has escalated despite a commitment made in July by Vince Cable, the Business Secretary, to hand 150,000 Royal Mail employees free shares in the company likely to be worth roughly £2,000-per-worker.

As a further sweetener, staff will be guaranteed a proportion of the retail element of the initial public offering (IPO).

Strikes could be held in October if employees vote for industrial action

The share giveaway to staff will encompass 10% of Royal Mail's equity, in accordance with the Postal Services Act that paved the way for the sell-off of the company two years ago.

At an overall valuation of between £2.5bn and £3bn, that would value the employees' stake at up to £300m.

Members of the public will also be able to buy shares in Royal Mail through intermediaries, a website and in Post Office branches.

Royal Mail and the Department for Business, Innovation and Skills both declined to comment, although one source said an announcement about the flotation could yet be delayed depending on external factors.

The Government has vowed that the threat of a strike will not deter it from selling shares during the current financial year.

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BoE Holds Interest Rate At Record 0.5% Low

The UK interest rate will remain unchanged in September, the Bank of England has said, but analysts believe signs the economy is improving could see the cost of borrowing rise sooner than previously thought.

Bank of England governor Mark Carney had pledged to leave the interest rate at its current record low level of 0.5% until the unemployment rate falls to 7%, which it expects to happen in 2016.

The forward guidance policy was brought in an attempt to stimulate growth.

But it has so far failed to have the desired effect on the City, with a series of caveats to the announcement last month prompting market expectations to be brought forward rather than pushed back.

A raft of exceptionally strong sector surveys this week has added to fears that rates may rise sooner than the 2016 date suggested by the Bank.

James Knightley, economist at ING Bank, said with the housing market potentially heading for another boom and inflation already well above the 2% target, one or more of the Bank's so-called knockouts could be triggered.

"As such, markets - ourselves included - suspect that the first rate hike is more likely to come in early to mid 2015," he said.

But some experts gave Mr Carney and his forward guidance strategy a vote of confidence.

Alan Clarke, a director at Scotiabank, said: "The Bank is not going to be whipped around by short-term swings in the market - higher market interest rates are probably an irritation, but not a game changer at this point."

"Based on the fact that the vast majority of economists still expect unchanged rates for around two years, forward guidance has been a runaway success."

The Bank also made no change to its recent asset purchase programme under which the Bank has spent £375bn on British government bonds.

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Canadians Swoop On Stake In City Broker Oriel

By Mark Kleinman, City Editor

One of Canada's biggest banks is in talks to buy a stake in Oriel Securities, a leading City broking firm, as the consolidation sweeping across the sector gathers pace.

Sky News understands that Canadian Imperial Bank of Commerce (CIBC) is negotiating the acquisition of a minority shareholding in Oriel, which was founded in 2002 and has long been touted as a potential takeover target.

The size of the stake that CIBC would buy and the price it will pay have not yet been finalised, but a deal could be tied up within a matter of weeks, according to people familiar with the talks.

CIBC's proposal has become the favoured choice of Oriel's chief executive, Simon Bragg, following the termination of separate discussions that he held several months ago about a full merger with Panmure Gordon, another City broker.

Oriel Securities claims to have raised more than £1bn for clients in Q1

Oriel, which has a multi-million pound loan outstanding from HSBC and like other brokers has been hit hard by the weak trading environment since the financial crisis, has nevertheless seen a recovery in its business performance this year, advising on deals such as the flotation of Conviviality Retail, owner of the Bargain Booze off-licence chain.

If a deal with CIBC is completed, it is expected to involve a broader alliance than the arrangement which currently involves the Canadian lender distributing Oriel research in North America.

It would also mark the latest tie-up between a Canadian bank and a City broker, following the takeover of Collins Stewart Hawkpoint by Canaccord last year.

A major round of consolidation has been expected in the small- and mid-cap broking industry for some time, and has accelerated in recent months, with the purchase of Evolution Securities by Investec and Seymour Pierce falling into administration and being carved up earlier this year.

Oriel has had a long-standing relationship with HSBC but is understood to pay a high coupon on its loan from the bank.

It is unclear whether a deal with CIBC would include replacing that debt, but one source involved in the talks said the primary purpose of a transaction was to provide "expansion capital" for the London-based group.

Oriel is also understood to be in discussions about acquiring the broking business which services the junior AIM stock market of Nomura Code, another competitor.

In February, Oriel lost its chief executive when David Knox stepped down amid "strategic differences" with other managers. Mr Bragg, who holds a big chunk of the firm's shares, took over from Mr Knox, who is now understood to be planning to establish a new broker.

Oriel has around 100 employees and boasted in April that it had raised more than £1bn for clients during the first quarter of the year, although it has shed staff during earlier rounds of cost-cutting.

Oriel declined to comment.

:: Picture of CIBC courtesy of Bill Burris

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Ryanair To Cut Flights Amid Profit Turbulence

Ryanair is to reduce flying schedules this winter after seeing its profit hopes dented by growing headwinds including weaker summer demand.

Shares in the no-frills carrier plunged by 14% soon after it issued the profit warning, just a month after chief executive Michael O'Leary had said that the heatwave in northern Europe in July had put people off travelling abroad to seek summer sunshine.

The airline said on Wednesday that a weaker pound, increased competition and Europe's continued economic problems were also having an impact on fares and the amount of money it makes per passenger.

Michael O'Leary wants to cut costs

It planned to respond to its weaker outlook by selectively reducing its winter season capacity and rolling out lower fares and "aggressive" seat promotions in markets including the UK.

The strategy will cut its annual traffic forecast by 500,000 to 81 million while profits will be at the lower end of its previous forecast of between £483m and £508m.

The announcement prompted share slides across the airline sector in early trading, with rival easyJet losing 7%.

Thomson Holidays owner TUI Travel and British Airways parent firm International Airlines Group were both 4% lower.

Airlines across Europe have been struggling with weak economies, high fuel prices and costly fleet upgrades.

Ryanair announced in July that it was raising charges for hold baggage as part of its campaign to eradicate the suitcase from its flights in a bid to save costs.

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Ex Co-Op Bank Boss Refuses Blame For Losses

The former boss of the Co-operative Bank and Britannia Building Society has told MPs he foresaw the "disastrous" failure of Co-Op to buy Lloyds branches.

Speaking to the Treasury Select Committee, Neville Richardson's evidence highlighted the financial problems behind the Co-op's failed plan to buy 632 Lloyds branches, known as Project Verde.

Mr Richardson said: "I have to say quite unequivocally that if I had known that Verde was going to be as all-consuming as it became I would not have been for it all.

"Because the disastrous consequences I warned of with the other programmes and Verde coming down the line were just being multiplied by Verde and the distraction Verde was creating."

The Co-operative bank announced a £709m pre-tax loss in the first half of the year and the group said there will be "no quick fixes" as it embarks on a four-year turnaround plan.

The group hopes to partly fill a £1.5bn hole in its cash reserves by raising £500m from its own bondholders.

Lloyds chief executive Antonio Horta-Osorio speaks to Sky's Jeff Randall

Mark Taber, who runs the Co-operative Action Group, an organisation made up of bondholders who are contesting the restructuring plans which could see them lose up to 60% of their investment told Sky's Jeff Randall: "The Co-op promised 12 weeks ago that they were conscious of the different interests and would look at alternative proposals and also pay for financial advice for them.

"We were promised they'd speak to us when these results come out, now they're saying they won't. It seems as if the Co-op group is trying to railroad people into a proposal. It's a very dangerous strategy."

Andrew Tyrie MP, who chairs the select committee, said: "There appears to be a yawning gulf between the evidence the Committee heard ... from Mr Richardson and the evidence we heard previously from Mr (Andrew) Bailey. The committee will be investigating this a good deal further."

In a rare broadcast interview with Sky's Jeff Randall, the chief executive of Lloyds banking group, Antonio Horta-Osorio, defended his company's due diligence procedure over the proposed sale.

He said: "We checked their finances and (those of) everybody in the market. If you look at the Co-operative group bonds which reflect the risk of the Co-operative group, until February of this year the risk was considered by the market to be as good as the average of the UK banks."

Lloyds, which is being forced to dispose of the branches as a condition of its bailout, confirmed in July that the branches would be re-branded as TSB Bank.

It is seeking an extension from the European Commission to dispose of them via an initial public offering.

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Lloyds Boss Praises Coalition On Economy

The chief executive of Lloyds Banking Group has told Sky News that Government action in support of first-time home buyers is already proving a "game changer for the British economy".

The boss of Britain's largest mortgage lender, Antonio Horta-Osorio, dismissed suggestions of a looming house price bubble arising from the Help-to-Buy and Funding for Lending Scheme initiatives.

He backed Government support for the UK residential market because, he said, until three months ago house price rises remained significantly below the level of inflation.

"This is a temporary scheme to correct a market anomaly," he said. 

Mr Horta-Osorio, told business presenter Jeff Randall that such schemes were helping instil confidence in a fragile economy.

Antonio Horta-Osorio was interviewed at the bank's HQ by Sky's Jeff Randall

He also expressed his view that the Government should not be a shareholder in UK banks.

Lloyds Banking Group, which also owns Halifax and Bank of Scotland, required a massive Government bailout in 2009 following the takeover of HBOS.

It remains 39% taxpayer-owned.

"It was an exceptional thing which should not happen again," he said

Shares were on Tuesday trading near the average price the taxpayer paid

"It's up to the Government to decide when and how to sell the shares." But he said: "We've done our bit" by restructuring the bank.

"Selling Lloyds shares is the right thing to do," he insisted.

The group had already announced half-year profits this summer of more than £2bn and Mr Horta-Osorio said the share price had now risen to a point where taxpayers could have their money back at a profit.

The bank has been beset by a number of embarrassing scandals.

Compensation for the mis-selling of payment protection insurance (PPI) has cost Lloyds Banking Group £7.3bn so far.

Mr Horta-Osorio described that sum as a "monumental bill" but maintained it was important to "break with the past".

Next week, 631 Lloyds branches are to be hived off to form TSB Bank.

It follows the collapse in May of a plan to sell the branches to the Co-operative Group.

Mr Horta-Osorio dismissed the suggestion that the decision had been a grisly blunder but insisted it was the "best alternative" at the time.

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Treasury Mulls Plan For £30bn RBS Bad Bank

By By Mark Kleinman, City Editor

The Treasury is examining proposals for a 'bad bank' at Royal Bank of Scotland (RBS) that would contain just £30bn of toxic loans, less than one-third of the sum originally envisaged by ministers seeking to bolster its role in reviving the British economy.

Sky News understands that the idea is among a range of asset pools currently under consideration as part of the review that was commissioned by George Osborne, the Chancellor, in June, and which is due to report its findings later this month.

The fact that such a comparatively modest portfolio is being seriously considered as the basis of an RBS 'bad bank' has surprised some of those involved in the project and has led some analysts to question whether such an initiative could be worthwhile.

It also highlights the quandary confronting Mr Osborne as he comes under pressure from MPs to commit to a break-up of RBS, which was rescued by UK taxpayers in 2008 at a cost of £45.5bn.

Some parliamentarians, as well as Sir Mervyn King, former Governor of the Bank of England, have been pushing for the creation of a state-owned bad bank because of their conviction that it would allow the cleaner part of RBS to step up its lending to UK businesses.

People close to the review say that the £30bn bad bank proposal would consist primarily of assets from Ulster Bank, RBS's Irish subsidiary, and the Global Restructuring Group that houses many of the loans to British companies that turned sour during the financial crisis.

It would, however, contain few assets from RBS's non-core division, which has already been radically slimmed down since 2008.

One person familiar with the deliberations said it would be "virtually impossible" for such a small carve-out to achieve Mr Osborne's objectives, which he outlined during his Mansion House speech earlier in the summer.

"We'll look at a broad range of RBS's assets, but particularly assets in Ulster Bank and UK commercial real estate. We're not prepared to put more taxpayer capital into RBS as part of this process," he said.

"We will establish a Bad Bank if it meets our three objectives: if it supports the British economy; if it's in the interests of taxpayers – and if it accelerates the return to private ownership. But if the review reveals that it would not achieve these things, then we won't do it."

Even if Mr Osborne does back the idea of a bad bank, however, the decision would rest with RBS's independent shareholders because UK Financial Investments, which manages the Treasury's stake, would be excluded from voting on the separation.

The other asset pools being considered by the Treasury and its external advisers at Rothschild and BlackRock are considerably larger, but even the largest contains only a fraction of the £325bn of loans insured by RBS in the Asset Protection Scheme until last year.

A 'no' vote would leave the Treasury at odds with the Parliamentary Commission on Banking Standards, whose chairman, Andrew Tyrie, called last month for the bad bank review to be both independent and rigorous.

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Vodafone's $130bn Windfall After Verizon Deal

Vodafone has confirmed it is selling its stake in America's largest mobile phone company in the third largest corporate deal in history.

Verizon Communications will buy the British firm's 45% stake in their joint US venture Verizon Wireless for $130bn (£84bn), in an agreement which could provide a boost to the UK economy.

Verizon Wireless is most profitable mobile service provider in the US and the new agreement is the culmination of Verizon Communications' decade-long attempt to win full control of it.

Under the terms of the deal, Vodafone would get $58.9bn (£38bn) in cash, $60.2bn (£39bn) in Verizon stock, and an additional $11bn (£7bn) from smaller transactions that would take the total deal value to $130bn, Verizon said.

The deal marks the British telecom giant's exit from the large but mature US mobile market.

The windfall would allow the FTSE 100 company to plot further expansion and return cash to shareholders.

There is speculation it would issue a special dividend which could yield investors up to £40bn in total - cash that might find its way back into the economy, partly through tax.

However, there is also the possibility of controversy over the way the deal is arranged amid reports that Vodafone's tax liabilities will be minimised by completing the transaction through its Luxembourg subsidiaries and other offshore companies.

Verizon Communications will have full control of Verizon Wireless

Margaret Hodge, chairwoman of the Commons Public Accounts Committee which has investigated corporate tax avoidance, said she wanted the deal to be examined in detail.

"Clearly there are concerns on this deal," she said.

"I just want some assurance that HM Revenue and Customs (HMRC) will be going through this deal with a tooth comb to ensure that the taxpayer gets the proper benefit under the law of the tax that Vodafone should pay on this massive windfall profit that they are making."

Mrs Hodge urged HMRC to ensure there was no "aggressive tax avoidance" in the way the deal was done.

Vodafone chief executive Vittorio Colao told Sky News: "We apply standard rules and we have to apply standard laws in all the countires.

"If this transaction happened in the UK, under UK standard rules this transaction would not be taxable. These rules have been there for years.

"Now the transaction happens in Netherlands which are the exactly the same rules as the UK. Now the important thing is there are £54bn going back into our shareholders many millions fo whom are UK and will benefit from transaction."

The only larger deals in corporate history were Vodafone's $183bn acquisition of Mannesmann in 2000 and internet giant AOL's $182bn takeover of Time Warner in 2001.

Verizon has had a long-standing interest in buying out its partner, but the two companies have never managed to agree on a price until now.

Analysts said Verizon wanted to pay around $100bn for Vodafone's stake, while Vodafone had been pressing for the higher sum.

Vodafone shares, which rose sharply last week, rose 4% in early trading on Monday before extending those gains past 12% in the afternoon.

The change is not expected to have much of an effect on Verizon consumers or on its operations as Vodafone had little influence on Verizon Wireless' operations.

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Young Brits 'Could Miss Digital Jobs Boom'

Up to 750,000 jobs could be created in the next five years to fuel Britain's "burgeoning" digital economy, a report has predicted.

Mobile phone giant O2 said the continued growth of the digital sector offers "fantastic opportunities for tech-savvy young people", but warned not enough was being done to harness their skills.

Ronan Dunne, chief executive of the company's parent firm Telefonica, told Sky News: "If we don't generate those jobs using British youngsters with the right skills, businesses will have to look overseas.

"With the situation in the UK, where one million young people are out of work, we have to make sure we get the schooling elements right, the employer elements right and the readiness for work right."

Research by O2 suggests that 20% of the 750,000 possible vacancies would be entry-level jobs, suitable for people entering the world of work for the first time.

Many roles would be linked to the nationwide roll-out of 4G technology, which offers faster mobile internet speeds.

However, Mr Dunne said employers must show a greater willingness to recruit school leavers in order for the digital jobs boom to have a noticeable impact on youth unemployment.

"The onus cannot be on the Government alone," he said.

"Businesses must proactively seek out opportunities to collaborate to maximise the digital growth opportunity and harness the potential of the next generation.

"As digital natives, young people possess valuable skills that will be the future fuel of our economy, but not enough is being done to harness them."

Mr Dunne's comments came at the opening of Campus Party Europe, one of the world's biggest technology festivals.

Up to 60,000 young people are expected to attend the week-long event at The O2 in London.

As well as 100 guest speakers, the event features a digital skills marketplace, where school leavers can meet potential employers, and a hackathon, which aims to teach young people basic coding skills.

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Wonga To Waive Dividend Despite Record Profit

By Mark Kleinman, City Editor

Wonga, the financial services company which has found itself at the heart of the controversy over the payday lending industry, will on Tuesday announce that it made record profits of more than £1m-a-week last year.

Sky News understands that the privately-owned group will report annual earnings of roughly £65m for 2012, an increase of approximately 50% on the previous year, buoyed by a huge spurt in customer numbers and ongoing international expansion.

The results will reinforce Wonga's status as one of the UK's most successful technology companies, although they will also provide further ammunition for critics of the sector weeks after it became the target of a broadside from the Archbishop of Canterbury.

Errol Damelin, Wonga's founder and chief executive, will say on Tuesday that Wonga will maintain its record of eschewing a dividend and ploughing the company's earnings back into product development and a push into new markets.

Referring to the Church of England's desire to participate in the growing credit union movement, Dr Justin Welby said he had told Mr Damelin that he wanted to "compete [the company] out of existence".

The remarks sparked acute embarrassment for the Archbishop, however, when it emerged that the Church of England's pension fund was among the investors in one of Wonga's financial backers.

Wonga has sought to counter many of the criticisms levelled at payday lenders by pointing out that it only makes short-term loans to consumers and highlighting the fact that it only lends money to consumers who have been subjected to credit-checks. Customers can also repay loans early with no additional charge.

Dr Welby subsequently sought to clarify his remarks by praising Mr Damelin's track record as a businessman and denying that he was seeking to portray Wonga as an irresponsible company.

Earlier this year, the payday lending sector was referred to the Competition Commission amid political anger about the activities of some short-term lenders.

In 2014, the industry will come under the remit of the Financial Conduct Authority, and the City regulator will have powers allowing it to ban advertising and impose a cap on interest rates charged by lenders.

In remarks published on its website last month, Wonga said: "Since 2007 Wonga has responsibly lent over £2bn and we now have over a million customers.

"We've done that despite declining three quarters of all first loan applications and ensuring a principal default rate (money lent that we don't get back) of around 7%. This is comparable to other forms of short-term credit, such as credit cards.

"We work hard to lend only to the people who can pay us back, and our mainstream services for individuals and businesses are now available across three continents."

Wonga, which is planning to launch in Spain, declined to comment on its 2012 results ahead of Tuesday's announcement.

The record profits will fuel speculation that Wonga's management and shareholders will look to float the company on New York's Nasdaq technology stock exchange, although such a move is unlikely in the near term.

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Lenders To Fork Out £1bn For Iceland Losses

By Poppy Trowbridge, Business and Economics Correspondent

British banks, building societies and credit unions have begun making multimillion pound payments to cover the costs of the Icelandic banking crisis.

When the banking crisis struck Iceland in 2008, hundreds of thousands of British savers had deposits in Icelandic banks, many through accounts at Icesave which went bankrupt.

At the time, concern mounted over the potential losses for UK customers so the UK Government stepped in to ensure that no one lost their money.

British banks are now repaying the Government for that expense, by writing out cheques for up to £1.089bn of this compensation.

Anthony Browne, chief executive of the British Bankers Association, said: "The UK banking industry is today picking up the tab for £1bn of the costs of the Icelandic banking crisis. This money ensured that no savers who had money in Icelandic banks lost out.

"We hope it gives confidence to consumers that if there is ever another bank failure that their savings will be protected."

Mr Browne says the fact the banks are able to make these repayments now shows that the industry is returning to health.

The money will be paid in three instalments, over three years from today and are required under the Financial Services Compensation Scheme which protects customer deposits in the event of bank failure. 

The scheme now covers all customers' savings up to the value of £85,000 should another bank go into insolvency.

Joe Rundle, head of trading at ETX Capital, told Sky News: "The news is actually positive for the vast majority of savers who are guaranteed by the compensation scheme.

"It is our inherently sturdy, transparent and reassuring compensation scheme which provides comfort and confidence to savers who need protection, especially in times like this."

However, he added: "It couldn't come at more difficult time for the UK banking sector which is evolving rapidly.

"UK banks will ultimately end up having to raise more capital to fund this repayment which will be met with disappoint by shareholders."

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Wonga To Waive Dividend Despite Record Profit

By Mark Kleinman, City Editor

Wonga, the financial services company which has found itself at the heart of the controversy over the payday lending industry, will on Tuesday announce that it made record profits of more than £1m-a-week last year.

Sky News understands that the privately-owned group will report annual earnings of roughly £65m for 2012, an increase of approximately 50% on the previous year, buoyed by a huge spurt in customer numbers and ongoing international expansion.

The results will reinforce Wonga's status as one of the UK's most successful technology companies, although they will also provide further ammunition for critics of the sector weeks after it became the target of a broadside from the Archbishop of Canterbury.

Errol Damelin, Wonga's founder and chief executive, will say on Tuesday that Wonga will maintain its record of eschewing a dividend and ploughing the company's earnings back into product development and a push into new markets.

Referring to the Church of England's desire to participate in the growing credit union movement, Dr Justin Welby said he had told Mr Damelin that he wanted to "compete [the company] out of existence".

The remarks sparked acute embarrassment for the Archbishop, however, when it emerged that the Church of England's pension fund was among the investors in one of Wonga's financial backers.

Wonga has sought to counter many of the criticisms levelled at payday lenders by pointing out that it only makes short-term loans to consumers and highlighting the fact that it only lends money to consumers who have been subjected to credit-checks. Customers can also repay loans early with no additional charge.

Dr Welby subsequently sought to clarify his remarks by praising Mr Damelin's track record as a businessman and denying that he was seeking to portray Wonga as an irresponsible company.

Earlier this year, the payday lending sector was referred to the Competition Commission amid political anger about the activities of some short-term lenders.

In 2014, the industry will come under the remit of the Financial Conduct Authority, and the City regulator will have powers allowing it to ban advertising and impose a cap on interest rates charged by lenders.

In remarks published on its website last month, Wonga said: "Since 2007 Wonga has responsibly lent over £2bn and we now have over a million customers.

"We've done that despite declining three quarters of all first loan applications and ensuring a principal default rate (money lent that we don't get back) of around 7%. This is comparable to other forms of short-term credit, such as credit cards.

"We work hard to lend only to the people who can pay us back, and our mainstream services for individuals and businesses are now available across three continents."

Wonga, which is planning to launch in Spain, declined to comment on its 2012 results ahead of Tuesday's announcement.

The record profits will fuel speculation that Wonga's management and shareholders will look to float the company on New York's Nasdaq technology stock exchange, although such a move is unlikely in the near term.

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Lenders To Fork Out £1bn For Iceland Losses

By Poppy Trowbridge, Business and Economics Correspondent

British banks, building societies and credit unions have begun making multimillion pound payments to cover the costs of the Icelandic banking crisis.

When the banking crisis struck Iceland in 2008, hundreds of thousands of British savers had deposits in Icelandic banks, many through accounts at Icesave which went bankrupt.

At the time, concern mounted over the potential losses for UK customers so the UK Government stepped in to ensure that no one lost their money.

British banks are now repaying the Government for that expense, by writing out cheques for up to £1.089bn of this compensation.

Anthony Browne, chief executive of the British Bankers Association, said: "The UK banking industry is today picking up the tab for £1bn of the costs of the Icelandic banking crisis. This money ensured that no savers who had money in Icelandic banks lost out.

"We hope it gives confidence to consumers that if there is ever another bank failure that their savings will be protected."

Mr Browne says the fact the banks are able to make these repayments now shows that the industry is returning to health.

The money will be paid in three instalments, over three years from today and are required under the Financial Services Compensation Scheme which protects customer deposits in the event of bank failure. 

The scheme now covers all customers' savings up to the value of £85,000 should another bank go into insolvency.

Joe Rundle, head of trading at ETX Capital, told Sky News: "The news is actually positive for the vast majority of savers who are guaranteed by the compensation scheme.

"It is our inherently sturdy, transparent and reassuring compensation scheme which provides comfort and confidence to savers who need protection, especially in times like this."

However, he added: "It couldn't come at more difficult time for the UK banking sector which is evolving rapidly.

"UK banks will ultimately end up having to raise more capital to fund this repayment which will be met with disappoint by shareholders."

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