HBOS expected to call for cash boost

28 April 2008 / by Rebecca Sargent
Rumours are rife today over the speculation that HBOS is contemplating a rights issue to raise an extra £4 billion.

According to experts, HBOS, the UK's largest mortgage lender and owner of Halifax and Bank of Scotland, is expected to announce a cash call to its shareholders today, ahead of its annual meeting tomorrow in Glasgow.

The rumours come amidst whispers of similar action expected from Barclays and Bradford & Bingley and a confirmed rights issue of £12 billion from RBS.

Several analysts have been speculating about this apparent domino effect for weeks, arguing that simultaneous calls for cash from British banks are inevitable; they are coming under considerable financial pressure as their share values decrease and their write-downs grow.

Rumours surrounding HBOS suggest that while the bank's balance sheet is at present healthier than those of other leading lenders, the bank is expected to make a cash call in order to keep things this way.

Just last week, RBS was forced to announce a record breaking £12 billion rights issue, which will soon see its balance sheet soar and overtake HBOS. Figures show that HBOS' Tier 1 capital ratio (the key measure of a banks capital) is 5.7 per cent, ahead of RBS' current 4 per cent and Barclays' 5.1 per cent.

Despite the bank's strong position, it is thought that current market conditions and possible write-downs of £3 billion have caused HBOS to think ahead and boost consumer confidence. HBOS was hit last month by malicious rumours which saw its share prices fall by a massive 17 per cent in a matter of hours. The Bank of England was forced to intervene and only then did share prices go back up, illustrating the extent to which nerves are infiltrating the economy at the moment.

As Barclays and Bradford & Bingley fail to rule out the possibility of a rights issue, the latest rumours come as little surprise to experts. The credit crunch is beginning to take hold and is hitting the mortgage market hard, an area that HBOS specialises in.

RBS, which announced its trend setting rights issue last week is also rumoured to be selling its insurance arm in attempts to raise further capital, and has already received bids from Italian insurer Generali. The bank, which took part in a €71 billion acquisition of Dutch bank ABN Amro last October, is expected to axe 7,000 jobs after the merge is complete.

©Fair Investment Company Ltd