City faces hefty bill as HBOS plummets

More banking woes, as HBOS's plunging share price looks set to cost its underwriters a fortune...

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Last Updated: 31 Aug 2010

It’s been a bad week all round in the banking sector. Yesterday a whopping £8bn was wiped off the value of its shares, with HBOS – which is currently trying to tap its investors for £4bn – leading the slide. In fact, HBOS fell so far (nearly 12%) that its shares closed below the proposed price of the forthcoming rights issue – and despite a rally this morning, it’s still trading below that 275p level. The beleaguered bank has now seen about £8bn wiped off its value in the last six weeks, which is pretty eye-watering by anyone’s standards. It certainly won’t do wonders for the reputation of CEO Andy Hornby – once the youthful superstar of the sector, he may soon be facing suggestions that he’s too wet-behind-the-ears for the role…

But although existing shareholders will have suffered more big losses, the biggest losers may be Morgan Stanley and Dresdner Kleinwort, who are underwriting the £4bn rights issue. If the share price remains below 275p, they’re going to have to buy all the new stock themselves – which will reportedly leave them sitting on a paper loss of about £250m and with a huge shareholding (about 30% in total) that they almost certainly don’t want. Bradford & Bingley recently let their underwriters off the hook by dropping its rights issue price, but HBOS claims it has no intention of following suit – it wants its £4bn, come what may.

As usual, short-sellers are getting the blame for these latest falls – the suggestion being that naughty hedge funds are forcing the price down by selling a load of borrowed shares, waiting for the price to fall and then buying them back cheaper (and pocketing the difference). Then again, a similar theory was proposed back in March when the HBOS share price dipped below 400p (seems like halcyon days now) but an FSA probe seemingly found no evidence of it whatsoever. As excuses go, it’s up there with retailers blaming the weather these days...

Just as likely is that investors are worried by HBOS’s big exposure to housebuilders (most of whose share prices have also tanked this week). And of course residential mortgages: as the UK’s biggest lender, it’s got more to lose than most from the rising rate of defaults in the housing market, while new business is well down for everyone on last year – 36% in May, to be precise, according to the Council of Mortgage Lenders today (although more positively, last month’s figure was 10% higher than April's).

Indeed, the City appears to have very little to shout about at the moment. This morning we’ve also seen more gloomy retail news, with sales at Homebase sliding 12% last quarter and Carphone Warehouse’s broadband take-up also down. ‘We remain cautious in our outlook for the year ahead, given the poor economic climate and inflationary pressures on European consumers,’ boss Charles Dunstone moaned today.

Still, it could be worse – he could be an underwriter at HBOS...

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