HBOS takeover backed as bad debts soar

BIRMINGHAM, England (Reuters) - HBOS won shareholder approval for its acquisition by Lloyds TSB on Friday after a day in which its shares were hammered by soaring bad debts.

HBOS staff demonstrate outside the HBOS shareholders EGM meeting in Birmingham, December 12, 2008. REUTERS/ Eddie Keogh

HBOS, which received overwhelming support for its takeover by Lloyds, warned bad loans and other losses this year had jumped by two thirds in just two months to 8 billion pounds.

As banks globally grapple with the deteriorating economic climate, analysts had expected HBOS shareholders to approve the merger and it was duly backed by investors holding 98.45 percent of its shares by value.

But the bank’s bad loans position sent a shiver through lenders and showed how quickly the economy is worsening, especially for corporate loans.

HBOS shares fell over 20 percent and other bank stocks also tumbled as the profit warning was accompanied by a bleak outlook.

“Global market and economic conditions, UK recession and increasing unemployment will continue to present a particularly challenging operating and credit environment,” said HBOS, the country’s biggest home loans lender.

“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.

HBOS shares closed down 23 percent at 67-1/2 pence, after falling as low as 66.7p. Shares in Lloyds and Royal Bank of Scotland slumped 18 percent and 15 percent respectively while Barclays lost 8 percent.

Bad news is flooding in from banks around the world. JPMorgan’s chief executive warned on Thursday the biggest U.S. bank had a “terrible” November and December, and hours later Bank of America said it may cut as many as 35,000 jobs.

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The problems make the need for a takeover by Lloyds to create a dominant UK retail bank with a stronger capital position even more pressing, analysts and investors said.

“I shall vote in favour 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.

Some investors at the meeting were more hostile, however.

“I am appalled at the way the company has been run. How any board can turn a 50 billion pound company into a basket case in 12 months is beyond me,” said Peter Hackworth, a private shareholder, who asked executives if they would return pay and bonuses from last year.


The bank’s chairman and chief executive apologised to investors for the troubles that brought the lender, whose origins date back to 1695, to its knees.

“I would like to say sorry for the anxiety our shareholders have felt during what has been an extremely challenging time for HBOS,” outgoing CEO Andy Hornby said.

HBOS said the losses would hit its capital ratios, but it declined to say by how much. Lloyds said the additional losses would not have a major impact on the 10 billion pound negative capital adjustment it planned for when the deal completes.

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HBOS’s 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.

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.

Trustees of the HBOS pension plan said uncertainty about whether Lloyds will support a final salary pension scheme meant they may call an actuarial valuation of the scheme, which could have a funding deficit of 3 billion to 5 billion pounds.

Additional reporting by Victoria Bryan; Writing by Steve Slater; Editing by John Stonestreet and David Holmes