HBOS takes £8bn write-down as UK economy weakens

HBOS sent another wave of panic through the banking industry today after revealing that its bad debts will top £8bn this year, wiping out more than half the £15.5bn of emergency capital raised by the lender so far.

Shares across the sector tumbled, with HBOS crashing 20pc and Lloyds TSB 17pc as HBOS investors gathered in Birmingham and voted on its merger with Lloyds TSB. Preliminary indications show they voted overwhelmingly in favour.

Royal Bank of Scotland was off 17pc and Barclays 13pc by early afternoon, while analysts at Dresdner Kleinwort said “more capital increases [are] virtually inevitable” on top of the £50bn being injected into Britain’s eight largest banks.

HBOS revealed that bad debts on mortgages, credit cards and corporate lending – plus writedowns on “toxic” debts – had reached £8bn in the first 11 months of the year. The figure is a £3.2bn increase since September alone.

Collins Stewart described the announcement as a “profits warning”, adding “we have very little confidence as book values continue to be impaired monthly”.

HBOS’s corporate lending book bore the brunt of the damage. Bad debts in the division have rocketed from £500m in June to £3.3bn and the value of its equity investments, a pioneering partnership approach to lending that now looks to have been a disaster, has crashed from a £100m profit to an £800m loss in the same period.

The bank warned that problems in the division will “continue to impact results in the short to medium term” and that “investment valuations are expected to remain under significant pressure in our private equity and joint venture businesses”.

The £8bn of losses will eat into the £15.5bn of capital the bank is raising this year – £4bn that has already been collected from a rights issue and £11.5bn from the taxpayer. Collins Stewart reckons the sharp deterioration in the quality of the corporate loan book, which took the market by surprise today, will “delay profitability of standalone HBOS by another year to 2010 at least”.

Bad debts in the mortgage book have more than tripled in the five months since June, from £200m to £700m. For the same period, impairments on credit cards and other unsecured lending have doubled to £1bn. HBOS warned: “In light of the worsening economic climate, trends in retail impairment charges are likely to come under further pressure.” The “toxic” credit portfolio increased writedowns from £1.1bn to £2.2bn in the five months.

The poor numbers will add weight to Lord Stevenson’s suggestion last month that without the Lloyds merger HBOS would face full nationalisation. Shareholders are expected to vote the merger through at today’s meeting, despite attempts by Scottish nationalists to break the deal up and preserve independence for HBOS’s Scottish unit, Bank of Scotland.

HBOS added that margins were under increasing pressure after the Bank of England cut the base rate by two and a half percentage points in the last two months to 2pc. Lower interest margins “will impact on HBOS capital ratios”, it warned, raising the spectre of another call on the taxpayer for more support.

In addition, the bank has estimated that baling out UK savers at Bradford & Bingley and the Icelandic banks will cost it £200m since the lion’s share of the burden will fall on the industry.

However, the bank said: “Through the injection of capital and liquidity facilitated by the Government, HBOS remains confident in its ability to navigate through this difficult period, as it becomes part of the enlarged Lloyds Banking Group.”

By Philip Aldrick, Banking Editor
Last Updated: 4:45PM GMT 12 Dec 2008

Source: The Telegraph

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