Doubts over strength of Lloyds’ new superbank

One analyst, James Hamilton of Numis, went so far as to suggest that if the deal did not inject confidence into the market the hedge funds and short-sellers "will just move their short interest to the merged Lloyds/HBOS".

He said there was a "very real prospect of short sellers targeting the larger group, which has a greater funding shortfall than HBOS alone".
His fears were echoed by Jonathan Jackson of Killik Capital, who said: "The combined group is still only 55% funded from customer deposits and the risk is that the shares become the target of short selling if fears rise that capital needs to be raised in the future."

Alex Potter at Collins Stewart said: "Lloyds will be weakly capitalised."

"Funding will be the key," said Derek Chambers, of Standard & Poor's Equity Research. "The plans to grow new business look ambitious and the cost savings look modest. They will need to save lots of cash."

That was emphasised when the enlarged bank said that it would follow most of its rivals in paying its next dividend in shares rather than cash.
Lloyds said that in order to attain its "desired capital ratios and financing the growth of the business" its final dividend this year will be paid in shares.

That will save it almost £1.4 billion because last year it paid a final dividend of 24.7p a share in cash.

But Lloyds went further, saying in future it will pay out only 40% of its earnings in dividends that, according to most analysts, means a cut in the full-year payout from 35.9p in 2007 to between 20p and 21p in 2009.

Lloyds today said that it expects the takeover to boost its earnings by a fifth from 2011 onwards.
It said it had identified cost cuts and synergies "significantly in excess of £1 billion a year" by the same date.

Lloyds chief executive Eric Daniels admitted that it would have been almost impossible for this deal to have happened a year ago, but at the same time he denied reports it was either a forced or "a Government-brokered marriage".

Daniels said that immediately after the deal — which is expected to complete early — next year the bank would have core tier 1 capital ratio, the measure most used by analysts for balance sheet strength, of 5.9%.

That is marginally below its target of a ratio of between 6% and 7%, and less than the 6.2% it reported at the half-year stage. At its half-year stage HBOS's core tier 1 ratio was even better at 6.5%.

Daniels said Lloyds was prudent to seek to accelerate achievement of his target, but he did not expect to hit it until 2010. Analysts said that indicates how weak HBOS's balance sheet may have become.

The deal needs the backing of 75% of HBOS shareholders in a vote and there are already signs some major institutions are unhappy about today's deal.