HBOS could end up 'poisoning' takeover partner Lloyds TSB

Published on Tuesday 16 December 2008 20:30

THE newly created Lloyds Banking Group may need to raise additional capital and could end up being "nationalised", a leading City analyst has warned.

Simon Pilkington, a banking analyst at JP Morgan Cazenove, is one of several City observers who are beginning to express fears over the Lloyds takeover of HBOS, which will formally be constituted next month.

Pilkington and other analysts have been studying HBOS's announcement on Friday of corporate impairments of 1.7 billion in the nine months to September, and the additional 1.6bn it admitted to in the following two months to end-November.

In a note to clients, Pilkington wrote that "the probability of nationalisation now feels uncomfortably high".

He added: "We are conscious that our estimates show a poor outcome and there is great uncertainty. Yet the speed and scale of deterioration at HBOS Corporate is remarkable."

Pilkington said that he believed now that Lloyds Banking Group "will be in loss in 2009 and 2010".

The warning came as another analysts focused in on HBOS's highly negative trading update on Friday, which coincided with a vote of its shareholders in favour of its takeover by Lloyds TSB to form Lloyds Banking Group.

Alex Potter, at Collins Stewart, said HBOS's corporate asset quality looked "very weak". He said the latest up-dates meant there would be delays in profitability for "standalone HBOS" assets within the new Group by "another year to 2010 at least".

Potter said: "You cannot rule out a round two of recapitalisation. It would not be exclusive to Lloyds Banking Group.

"But as far as 'nationalisation' goes, it has become touch and go. Is the government having over 50 per cent equivalent to a bank being nationalised?"

He pointed out that the taxpayers already has 59 per cent of Royal Bank of Scotland.

Potter added that a difficulty in working out a return to profitability at the HBOS businesses to be subsumed in Lloyds was that "it seems to be getting massively worse on a month by month basis".

Other banking analysts said the "shocking" trading update by the bank showed the vulnerability of its trading model in the current extraordinary conditions for the banking sector.

Asked if a further recapitalisation of Lloyds/HBOS was likely, Leigh Goodman at Fox-Pitt Kelton said: "Frankly you cannot rule it out, although it is not our expectation at this stage."

Goodman said the latest trading update from HBOS, while unnerving the stock market, showed that the bank needed a rescue takeover.

He added: "It's a bank built for a bull market. It does not work when property prices do not rise and liquidity is not plentiful. The management have got to take a share of the blame for this."

Fox-Pitt said it was easily conceivable that the Lloyds Banking Group could still be in the red "in the second half of 2009 and first half of 2010".