HBOS looks to plug a £4bn hole

Much to nobody's surprise, HBOS will tap shareholders for cash as it looks to shore up its balance sheet...

Last Updated: 31 Aug 2010

The Glasgow-based bank plans to raise £4bn by offering stockholders two new shares for every five they own, at a price of 275p – a 45% discount on last night’s closing price. The rights issue, which was first reported at the weekend but not confirmed until this morning (we don’t quite understand why they weren’t compelled to do it earlier, given its potential influence on the share price, but there you go) will increase its capital ratio (a measure of the bank’s level of risk) above 6% - so it will have enough spare pennies for the rainy days that lie ahead.

Like RBS – which has just launched a much larger £12bn cash call – HBOS is suffering from the carnage in the US housing market. The falling value of its Alt-A mortgage book (the one up from sub-prime) has forced it to write down £2.8bn – hence the need for the rights issue. And that’s not all – HBOS also plans to squirrel away a bit more cash by paying out its dividend in shares and cutting the proportion of its profits that it pays out to shareholders in future. Since HBOS has about 2m shareholders following the Halifax demutualisation in 1997, that’s going to be bad news for a lot of people.

All of which is bound to be a bit embarrassing for HBOS and its CEO Andy Hornby, which was insisting just last month that it had ‘an exceptionally strong balance sheet’ – particularly since it actually increased its dividend back in August. However, Hornby said today the rights issue would ‘achieve a step change in our capital strength’ as the bank planned for a ‘more challenging environment ahead’, and even suggested it might allow them to benefit from growth opportunities in the months ahead – a glass-half-full outlook if ever there was one... (Or, perhaps, more evidence of the banks' appalling communication skills during the current crisis - few of them would scrape a GCSE pass in PR...)

But the snippet of good news (for those of us who don’t own HBOS shares, anyway) is that it doesn’t think the UK economy is on its last legs. It’s predicting growth of 1.25%-1.5% (so like almost everyone, it thinks Alistair Darling’s estimate of 1.75%-2.25% to be ludicrously optimistic) ‘relatively strong’ employment, and a ‘mid single digits’ fall in house prices. As Britain’s biggest mortgage lender, it will be hoping that is indeed as bad as it gets...

Assuming RBS and HBOS succeed in re-stocking their coffers, it might well increase the pressure on other banks to follow suit – particularly Barclays, which apparently has a weaker balance sheet than both. So far Barclays boss John Varley has insisted that it doesn’t need fresh capital – but then that’s what HBOS was saying last month...

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