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HBOS warns of tougher times ahead

Created:
19 June 2008
Written by:
Jonas Crosland

Just in case you hadn't got the message from Bank of England governor Mervyn King, and chancellor Alastair Darling, Halifax owner HBOS has weighed in with some more doom and gloom. Shares in the UK's biggest mortgage lender fell by over 4 per cent to 305p after it announced fresh provisions of £200m, and warned that weaker economic conditions will push up provisions for mortgage defaults.

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Bad loans stood at £4.95bn at the end of May, up 17 per cent from £4.23bn at the end of 2007, while late payments from landlords and non-standard mortgages rose from 2.6 per cent of total mortgages to 3.1 per cent. Those metrics are likely to rise further if the housing market continues to weaken.

The picture for new lending is scarcely any better. HBOS expects mortgage lending this year to fall by 45 per cent, and house prices by 9 per cent. The latter number may turn out to be optimistic, given that house prices have fallen five per cent in the last two months alone.

The bank's exposure to a weak housing market is further complicated by its holdings in house builders. Only last April it bought a 40 per cent stake in Tulloch Homes, and it has investments in other developers, including retirement housing specialist McCarthy & Stone, and Crest Nicholson. You only have to look at what's happened to the prices of quoted housebuilders (see Housebuilders in meltdown) to appreciate how the value of these investments has fallen.

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SHARE TIP UPDATE:

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Shares in HBOS have fallen 70 per cent from last year's peak, and recently fell below the 275p offer price set for its two-for-five rights issue (see HBOS rights: what to do). They've subsequently bounced back to around 303p, and at least today's statement didn't contain a Bradford & Bingley style profit warning. But we still think this bank's in for a tough year or two. We suggested selling shares in HBOS at 511p(10 April 2008) just before the rights issue was announced, and that remains our view.

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