* HBOS lifts writedowns, bad debts to 5.2 bln pounds
* Lloyds sees 9-month profits sharply lower
* Lloyds CEO expects to resume dividends in 2009
(Adds executive, analyst comments, details, updates shares)
By Steve Slater and Myles Neligan
LONDON (Reuters) - Britain's biggest home lender HBOS Plc HBOS.L doubled its hit from toxic assets and bad loans to over 5 billion pounds ($8.1 billion) on Monday and its takeover partner Lloyds TSB LLOY.L warned of a sharp fall in profits.
Lloyds also said it plans to writedown assets held by takeover target HBOS by up to 10 billion pounds due to accounting rules and as it takes a more stringent view of its target’s asset portfolio.
The banks said the takeover remained on track, and Lloyds said it expects to resume dividend payments next year after repaying preference shares taken by the UK government.
It raised its expected cost savings from the deal to 1.5 billion pounds per year from 1 billion pounds.
By 1400 GMT Lloyds shares were down 3.19 percent at 192 pence, valuing its offer at 116.2 per HBOS share. HBOS shares rose 4.8 percent to 104.1p, helped in part by a weekend report of a potential counterbid.
HBOS said it had taken a 5.2 billion pound hit from toxic assets and bad loans in the first nine months of the year, up 2.7 billion during the third quarter.
The 10 billion pound capital hit identified by Lloyds would come on top of this and include 3.8 billion pounds of fair value adjustments crystallised on the deal. Further losses would come from applying Lloyds’ more conservative valuation criteria on HBOS assets, and would be largely offset by positive adjustments on debt carried, Lloyds said.
Oriel Securities analyst Mike Trippitt said: “It’s Lloyds’ fair valuing of HBOS’ assets as they see it at the moment. I think there was a suspicion that something of this order of magnitude would be required.”
Lloyds stepped in to buy HBOS in a government-brokered deal in September, after HBOS was hit by a deepening global financial crisis and concerns about its exposure to the weakening UK housing market. It will create a dominant UK mortgage lender, savings and current account provider.
2009 “HORROR STORY”
Both banks said market conditions remain tough, citing rising bad loans to businesses and consumers as economic growth slows and house prices fall as the credit crisis bites.
Lloyds warned of a “substantial” drop in its nine-month profits.
James Hamilton, analyst at Numis Securities said: “Undoubtedly 2009 is going to be a complete horror story for all UK banks, with no exceptions.”
Analysts said HBOS’s writedowns were broadly as expected, while news of Lloyds’ intention to resume paying dividends was outweighed by concerns over how Lloyds would finance the repurchase of preference shares.
On a conference call Lloyds Chief Executive Eric Daniels told reporters: “We will remove the dividend block in 2009.
“We intend to buy out the preference shares in 2009,” he said, but declined to say precisely when dividends might resume. One option for financing the preference share repurchase was to raise cash from private investors, he said.
Banks taking cash from the UK government’s 37 billion pound bailout cannot pay dividends until preference shares have been redeemed. Lloyds had paid one of the highest UK dividends.
Weekend newspaper reports said Scottish entrepreneur Jim Spowart, founder of HBOS’ online bank Intelligent Finance, was working on a rival bid for HBOS with an unnamed foreign bank. Spowart could not be reached for comment.
Daniels said the cost savings generated by Lloyds’ deal would give it an advantage over other potential bidders.
“We are one of the few organisations that is well placed to take over HBOS. It requires a lot of know-how as well as capital,” he said.
HBOS’ writedown and impairment losses included a jump in bad debts at its corporate banking arm to 1.7 billion pounds at the end of September, more than treble the total at mid-year. Bad debt losses in its retail bank rose to 1.2 billion pounds.
Lloyds said it expects to write off 300 million pounds on bad corporate loans in the second half and take a further 120 million pound charge because of falling house prices.
Lloyds is offering 0.605 of its shares for each HBOS share.