Behind the spin: HBOS

THE DILEMMA.

by
Last Updated: 09 Oct 2013

As Britain's biggest mortgage lender, HBOS is suffering more than most from the downturn in the housing market. Throw in over £1bn in sub-prime losses, and you've got a bank that's in dire need of extra cash to shore up its balance sheet. However, since announcing a £4bn rights issue in April, its share price has been plummeting, amid accusations of malicious rumour-mongering - the shares are now so cheap that there's a real danger the rights issue this month could fail.

THE SPIN

When hints of funding problems first emerged in March, HBOS said it had an 'exceptionally strong balance sheet', prompting an FSA investigation into short-sellers. A month later, the bank admitted it would have to ask investors for £4bn - but insisted it was just putting something aside for a rainy day. Boss Andy Hornby talked about 'a step-change in our capital strength' and said the rights issue 'would ensure that we benefit from strong ratios, even if the macroeconomic environment deteriorates further'. Hornby actually spoke of funding 'selective growth opportunities' for HBOS.

THE STRAIGHT TALK

The FSA found no evidence that trading rumours were malicious; traders were clearly right to be sceptical about HBOS. And the FSA's new rule forcing traders to disclose large short positions backfired, revealing that US firm Harbinger Capital, one of the world's top hedge funds, was shorting 3% of HBOS stock, sending the HBOS share price even lower. Analysts didn't buy the growth line either: Citigroup suggested 'the company is providing a cushion to absorb potentially large impairment losses as property markets weaken'. HBOS itself admits the housing market continues to deteriorate: the number of borrowers falling behind on mortgage payments crept up again last month.

THE VERDICT

Nobody seems quite sure what will happen if HBOS shares keep trading below the proposed rights-issue price. Since the underwriters have to buy the stock anyway, HBOS will get its £4bn - but it will be a massive vote of no-confidence in the bank (and the City generally). Certainly, the last few months have tarnished the halo of whizz-kid CEO Hornby - and with more gloomy news on the housing market out every week, there's no reason why he should expect a share-price bounce any time soon. In fact, things are likely to get much worse before they get better. Any investor who buys HBOS stock now will need nerves of steel ...

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