September 17, 2008 / 3:03 PM / 11 years ago

Lloyds HBOS? Credit crunch makes anything possible

LONDON (Reuters) - News that British bank Lloyds TSB (LLOY.L) is on the brink of buying domestic rival HBOS underscores the speed with which regulators seem prepared to ditch long-held orthodoxies to counter the credit crunch.

HBOS HBOS.L, Britain’s biggest home loan lender, and Lloyds, which has previously been blocked from buying a smaller mortgage bank, can only have got so far by getting a nod from regulators that they want a deal to go ahead.

That unofficial steer follows the British government’s decision in February to put Northern Rock into public hands — the first major nationalisation in Britain since the 1970s and a move the ruling Labour Party had been keen to avoid.

Major action has been forced on regulators by the credit crunch in the United States where authorities have committed about $300 billion — an unprecedented sum — in the past 10 days to bail out mortgage lenders Fannie Mae FNM.N and Freddie Mac FRE.N and insurer AIG (AIG.N).

In Britain, an HBOS-Lloyds deal would not have been countenanced in the recent past.

HBOS is easily the country’s biggest mortgage provider with a 20 percent market share. Lloyds ranks fourth with an 8 percent share, giving a combined group a 28 percent market share.

In July 2001, the government blocked an 18.5 billion pound ($33 billion) bid by Lloyds for mortgage bank Abbey National (SAN.MC), shutting the door to takeovers among the country’s major banks and forcing them to look abroad.

“The merger would be against the public interest and should be prohibited,” Trade and Industry Secretary Patricia Hewitt said at the time, arguing the pair would have dominated current accounts and smothered competition for small business banking.

Lloyds never did a major overseas deal and, while it has not spent the past seven years in the wilderness, its share price has more than halved in value.

Now, it seems those same British authorities are encouraging the ‘Black Horse’ bank to ride to the rescue of a bigger mortgage bank than Abbey National was. A combined group would have a market value of about 28 billion pounds.

HBOS confirmed advanced talks with Lloyds after its shares were battered for a sixth consecutive day amid mounting fears about its funding position as the credit crunch and distress among U.S. banks raised the cost of borrowing. [nLH437309]

The announcement sparked a rally in its shares, helped by a BBC report that HBOS shares would be valued at nearer to last week’s closing price of 300 pence than their current level.

By 1458 GMT HBOS shares were down 18.2 percent at 149 pence having earlier dropped as much as 52 percent to 88 pence and Lloyds shares were up 1.8 percent at 284.5p.

Reporting by Dan Lalor; Editing by Erica Billingham

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