HBOS takes $11.9 billion hit as UK economy worsens

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 worker leaves HBOS offices, in Edinburgh, Scotland on September 18, 2008. REUTERS/David Moir

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.


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.

It added that pressure on net interest margins is building due to the recent cuts in UK base rates, which have been slashed to 2 percent.

Losses in its treasury portfolio due to falling asset values were 2.2 billion pounds, up from 1.8 billion.

HBOS said the injection of capital and liquidity under a UK government rescue plan left it “confident in its ability to navigate through this difficult period.”

Britain two months ago forced all banks into drastically increasing the level of capital they hold in reserve against bad debts to protect depositors. It imposed stringent stress tests on the lenders to ensure they could survive a recession.

“The stress testing that the Bank of England and the FSA asked for is becoming a reality,” MF Global’s Tazi said.

HBOS is raising 11.5 billion pounds from the government and investors, mostly through a placing of shares, to shore up its balance sheet. It could leave the government owning 43.5 percent of the combined Lloyds/HBOS bank.

The funding is conditional on the Lloyds deal going through.

The trustees of the HBOS pension plan said they were concerned that it had not received any proposals from Lloyds to support a final salary pension scheme.

The trustees said given the uncertainty they may call an immediate actuarial valuation of the scheme, which could have a funding deficit of 3 billion to 5 billion pounds.

Additional reporting by Victoria Bryan; Editing by John Stonestreet and Jon Loades-Carter