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Grim times at HBOS as merger gets the go-ahead
Nick Goodway12 Dec 2008
HBOS today painted one of the most dire pictures of the economy to date, as its shareholders overwhelmingly voted for the bank's £11.5 billion Government bailout and takeover by Lloyds TSB.
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.
Reader views (5)
Its interesting how the banks made so much profit then all of a sudden are now strapped for cash. What did they do with the profits they made - did they invest for the future? No. Did they put some aside to help get through any downturn? er No. Did they squander it on huge bonuses and pandering to the whims of shareholders? Yes. Well those same shareholders who were happy enough to push for even more profits (as if the amounts the were making were not good enough), have now seen the value of their shares fall to a fifth of what they were. Well it serves every corporate shareholder right. I have no sympathy. There is more than enough money around in the economy to keep things moving, but excessive profits and greediness has caused the current issues. I would like to think that we will learn from this, but human nature being what it is, sadly I doubt it.
- Steve Watson, West Sussex, 13/12/2008 12:27
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The interesting thing here is the that the huge losses are on corporate debt not property which has been seen as the banks' Achilles heel.
- Mike Newland, London, 12/12/2008 17:37
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As for HBOS, remember that it was Bank of Scotland who bought out both Halifax Building Society, AND own National Westminster Bank in CASH.
I think you will find it is The Royal Bank of Scotland that owns Nat West.
- Potter, norwich England, 12/12/2008 15:51
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Remeber that TSB was a naughty sell by Thatcher. It was already owned by its "Shareholders" on trust by the Government. They should have simply been given the equivalent of their shares without having to pay for them. There was a further naughty, in so far that LLoyds Bank should have paid the Government to "buy" the TSB from the Government of the Day, when they were already owned.
As for HBOS, remember that it was Bank of Scotland who bought out both Halifax Building Society, AND own National Westminster Bank in CASH.
The two above examples of Monopolies through the back-door, those are probably best one can think of. The Banks have become a cosy conortium and need to be stamped on. This proposed acquisition merely proves the point. And why hasn't the Banking Ombudsman done anything about the Banks leaving their overdraft and Credit Card APR's at now FOUR TIMES base rate?
Sorry banks, but the argument about balancing risk of write off agains cost of the back-to-back borrowing no longer rubs!
- Christopher Richards, Chelmsford United Kingdom, 12/12/2008 13:47
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As a small shareholder in Lloyds TSB Bank I really do question of the HBOS acquisition.
- Simon Hewitt, London, 12/12/2008 10:43
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