JP Morgan discusses breakup of UK's HBOS: report

HBOS signage outside the EICC building, ahead of their AGM today, in Edinburgh, Scotland June 26, 2008.

LONDON/SYDNEY (Reuters) - U.S. investment bank JP Morgan (JPM.N) has held talks with potential partners about forming a consortium to break up British mortgage lender HBOS HBOS.L, The Daily Telegraph newspaper reported.

National Australia Bank (NAB.AX), named by the Telegraph as a potentially interested party, played down the report, while a UK industry source said HBOS had not received an approach.

"We're not sure this is a clever time to make acquisitions," NAB Chief Executive John Stewart told reporters on Friday, shortly after NAB announced a further A$830 million ($798 million) in losses from its exposure to U.S. mortgages.

Without naming a source, the Telegraph said JP Morgan had also approached private equity firms and may talk to Spain's Banco Santander (SAN.MC) about a deal that would resemble the break up of ABN AMRO by a group of three banks last year.

NAB could be a buyer of HBOS's Australian arm, Bankwest, and may also be interested in its corporate banking unit, the report said.

HBOS, JP Morgan, and Santander all declined to comment.

Analysts have suggested that HBOS, Britain's biggest home lender, could make disposals to help absorb a potential rise in bad debts as the UK property market weakens.

The bank earlier this month raised 4 billion pounds ($7.94 billion) through a rights issue aimed at shoring up its balance sheet, depleted by asset write downs and rising funding costs in the wake of the credit crunch.

The bank's shareholders bought just 8.3 percent of the issue after HBOS' shares fell below the offer price of 275 pence, forcing underwriters to pick up the remainder.

"I don't think anybody thinks HBOS is going to get bought. I think it's more likely that they would potentially sell bits," said Fox-Pitt, Kelton analyst Leigh Goodwin, who believes the cost of funding HBOS' core UK mortgage operation would deter potential acquirers.

Analysts reckon HBOS disposals could include Bankwest, asset management unit Insight, and insurance arm Clerical & Medical, as well as its 60 percent stake in UK life insurer St James's Place (SJP.L).

HBOS shares were down 3.8 percent at 290.5 pence by 1008 GMT on Friday, while the FTSE 100 share index was 0.73 percent lower.

The Telegraph report said no consortium has been formed and talks could still fall through, while a break-up bid may meet opposition from UK regulators.

A combination of HBOS's mortgage business and Santander's UK operations including Alliance & Leicester ALLL.L -- the British lender which last week accepted a 1.3 billion pound offer from the Spanish bank -- would control about 32 percent of the British home loans market, exceeding the competition authorities' 25 percent limit.

(Additional reporting by Paul Day in Madrid, Douwe Miedema and Clara Ferreira-Marques in London; editing by Sue Thomas)