HBSO tries to reassure as shares fall 40%

Sep 16 2008

Halifax Bank of Scotland (HBOS) today sought to reassure investors over its funding, but failed to prevent its shares slumping for the second day in a row.

Britain’s biggest mortgage lender’s stock fell almost 40% at one point before closing 22% lower - making it by far the worst performer in the FTSE 100 Index.

Shares in the bank closed at 282p on Friday but have lost more than a third of their value in two days following the turmoil at Lehman Brothers.

Analysts have said HBOS needs to refinance more than £100 billion of funding during the coming months - which could be more challenging after the blow to confidence from Lehman’s demise.

Inter-bank lending rates also increased today, making funding more expensive.

HBOS was also downgraded by a ratings agency, but said it was “very confident” about its funding position.

It later told markets: “HBOS has a strong capital base and continues to fund very satisfactorily.”

But three month inter-bank lending rates were fixed at 5.791% today, up from 5.715% yesterday - the biggest daily jump in the rate since the bail-out of US investment bank Bear Stearns rocked global markets in mid-March.

The HBOS spokesman said: “We are the country’s largest savings institution and therefore have more retail deposits than any other UK bank.

“The credit crunch has been going on for over a year, and during that period we have demonstrated the sheer resilience of our funding franchise.”

But other banks have also been on the receiving end of some severe punishment during the Lehman Brothers-inspired turmoil.

Banking analysts said fears of a “fire-sale” of Lehman’s mortgage-backed securities - slashing the values of other banks’ holdings and leading to more hefty credit crunch write-downs - were helping to drive the sector sell-off.

Banking analyst Bruce Packard, at broker Pali International, said: “The fact that HBOS has been sold off suggests people are worried about the funding.

“But this is quite hard to quantify - it’s looking like banks are all being marked down as a whole.”

He also said credit default swaps - which effectively measure an institution’s debt risk - had risen in the case for HBOS.

Alex Potter at Collins Stewart said he estimated HBOS’ gross refinancing to be £127.9 billion using last available data at the end of 2007.

But he said the group’s net exposure would drop below £40 billion after taking into account normal short-term loan repayments it was able to make and £60 billion of liquid assets within the group.

Short-term funding markets remained open, he added, and gross exposure figures for rivals like Barclays and RBS were much higher at £242 billion and £351 billion respectively.

Mr Potter concluded: “We don’t believe HBOS has a liquidity issue.”

But he warned: “A Lehman fire-sale of assets could well generate (further significant mark-to-market impairments).”

Barclays and RBS could be much more exposed to this than HBOS, according to research from Mr Packard.

His data says Barclays has the largest exposure to US investment banks, asset managers and hedge funds of the big UK banks. Just under 25% of Barclays loans with that sector, compared to around 13% for RBS and less than 5% for HBOS, he said.

Mr Packard added: “A fire-sale of (Lehman’s) structured credit assets... could force UK banks to recognise more losses.”

Barclays suffered a £2 billion credit crunch hit during the first half, with RBS suffering a £5.9 billion write down.