HBOS takes $11.9 billion hit as UK economy worsens

By Myles Neligan and Steve Slater

BIRMINGHAM, England (Reuters) - HBOS Plc HBOS.L warned its bad debts and other losses this year had jumped by two thirds in just two months to 8 billion pounds ($11.9 billion) as corporate and home loans soured, just hours before a vote on the British bank's takeover.

A deteriorating economy sent corporate and retail bad debts sharply higher in October and November and more pain is ahead, the bank said on Friday. The profit warning sent HBOS shares tumbling over 19 percent, with rival UK lenders down by almost as much.

"Global market and economic conditions, UK recession and increasing unemployment will continue to present a particularly challenging operating and credit environment," Britain's biggest home lender said in a statement ahead of a vote on its proposed takeover by Lloyds TSB (LLOY.L).

The scale of the deterioration sent a shiver through the sector and showed how quickly the economy is worsening, especially for corporate loans, analysts said.

"On retail things are going to get worse, but people were expecting that. On the corporate side people knew it was going to get bad, but it's worse in terms of magnitude and speed of deterioration," said Mamoun Tazi, analyst at MF Global.

By 1020 GMT HBOS shares were down 19 percent at 71 pence, their lowest level . Shares in Lloyds and Royal Bank of Scotland (RBS.L) each crashed 17 percent and Barclays (BARC.L) lost 12 percent.

Bad news is flooding in from banks around the world. JPMorgan's (JPM.N) chief executive warned on Thursday the biggest U.S. bank had a "terrible" November and December, referring to the trading, loans and mortgage segments. Hours later Bank of America (BAC.N) said it may cut as many as 35,000 jobs.

The problems make the need for a takeover of HBOS by Lloyds more pressing, analysts and investors said. The deal to create a dominant UK retail bank is widely expected to win approval.

"I shall vote in favor because the bank has got itself into such a state it's the only way to save the company," said Gary Maddock, a private shareholder who typified the mood among investors before the meeting started.

CORPORATE LOAN GLOOM

HBOS said the losses would hit its capital ratios, but it declined to say by how much, and said the outlook was grim. In a statement ahead of the shareholder vote it said the deterioration in credit quality had accelerated and estimated asset values have fallen sharply since November.

Its charge for bad debts and losses on assets rose from 4.8 billion pounds at the end of September to 8 billion for the year to the end of November.

Bad debts on corporate loans almost doubled to 3.3 billion pounds from 1.7 billion. Losses on the unit's investment portfolio also rose to 800 million pounds from 100 million two months earlier.

Sharp declines in house prices and pressure on margins from interest rate cuts helped lift impairments on mortgages to 700 million pounds from 400 million, the bank said. The unsecured impairment charge was 1 billion pounds, up from 800 million.

"In light of the worsening economic climate, trends in retail impairment charges are likely to come under further pressure," it said.