Grim times at HBOS as merger gets the go-ahead

The owner of Halifax, the country's biggest mortgage lender, and Bank of Scotland said that in the last month it had been "operating in increasingly difficult conditions". Analysts said this was effectively a profits warning, and Lloyds rushed out a statement claiming the situation at HBOS was no worse than it had already calculated.

HBOS shares dropped 19.2p to 68.4p while Lloyds retreated 27.1p to 130.9p.

As the recession takes hold across the country, HBOS has seen both its personal but more especially its corporate customers suffering. In the first 11 months of the year, it has taken bad-debt charges totalling £5.8 billion, of which £2.8 billion came in the last two months alone.

The bank said: "There has recently been an acceleration in the deterioration in credit quality and further sharp falls in estimated asset values."

HBOS also warned that the latest cuts in interest rates (by 3% in the last three months) were making it increasingly difficult for banks to make money.

It said: "Pressure is building on net interest margins due to the significant reductions in UK base rates."

The scale of the swing across the economy from the financially stretched consumer to increasingly stricken business was clearly highlighted in how much HBOS has put aside for bad debts in the last two months.

On the retail side of the bank, largely Halifax, it took a £300 million charge against secured loans - almost entirely mortgages - in the last two months compared with £400 million in the first nine months of the year. On unsecured loans, the last two-month charge was £200 million against £800 million up to the end of September.

On the corporate side, largely Bank of Scotland, impairment charges are spiralling upward. Corporate lending impairment for the last two months was £1.6 billion, almost as much as the £1.7 billion for the whole of the preceding nine months.

Falls in the values of property and other investments caused a loss of £700 million in the bank's investment portfolio in October and November, compared with a loss of just £100 million in the nine months to end-September.

The pressure on margins as underlying interest rates fall to record lows was highlighted this month when Halifax trimmed its variable mortgage rate by only 0.25% after the Bank of England cut the base rate by 1%.

It said previous cuts of 0.5% and 1.5% had been passed on in full, but in the latest case it needed to hold on to part of the cut to keep attracting savers. This saw a swing from outflows of savers' money in September and October back to net inflows in November. HBOS said its losses on toxic asset-backed securities for the 11 months to November were now £2.2 billion, up from £1.8 billion at the end of September.

But it has taken advantage of new accounting rules to move £35.4 billion of such assets so it does not have to revalue them on a market-to-market basis. That has resulted in another "fair value" writedown of £4.5 billion.