Divi blow as HBOS seeks £4bn funds lift

The bad news for the bank's army of 2.1 million small shareholders is that their dividends are going to be cut, and this year's first-half payout will be in shares not cash. They will also have to stump up several hundred pounds in most cases in order to maintain their shareholding.

Britain's biggest mortgage lender now forecasts house prices will fall not just this year but next year too, in both cases by a single-digit percentage.

HBOS has taken a similar route to Royal Bank of Scotland last week with its £12 billion rights issue, selling the shares at a huge discount and paying the City a large fee to guarantee the fund-raising.

Investors are to be offered two new shares for every five they hold, at a price of 275p. That is a 45% discount to the closing share price of 495¾p last night. The shares today fell 3¼p to 492½p.

Chief executive Andy Hornby denied the bank had been forced to raise new funds. He said: "This is a strategic move, I cannot stress that enough. It is about our capital position for the next three to four years. The economy is going to be more challenging, and we want to be less leveraged. Clearly we discussed it with the Financial Services Authority and the Bank of England but there was no pressure whatsoever from the regulators." But the bank today announced much larger writedowns than it had so far taken. First-quarter writedowns total £2.84 billion, compared with £736 million for the whole of last year. Hornby said the bank still forecasts the UK economy will prove "fairly resilient" despite the gloom expressed in some quarters.

He expects asset growth to slow but margins to stabilise as the banks and building societies continue to tighten rates.

The rights issue will push HBOS's balance-sheet strength as measured by its core tier one ratio from 5.5% at the end of last year to a new target of between 6% and 7%. Hornby said that strength would allow HBOS to consolidate its position as the country's largestmortgage provider.

The rights issue has been underwritten by investment banks Morgan Stanley and Dresdner Kleinwort, which will pick up more than £60 million in underwriting and advisory fees.