HBOS doubled its hit from toxic assets and bad loans to more than £5 billion yesterday, as its would-be acquiror Lloyds TSB warned of a sharp slide in nine-month profitability.
The new writedowns from HBOS came as Lloyds upped its original estimates of planned cost savings from the deal by 50 per cent – or 500 million – to 1.5bn.
In a trading update released on the same day that Lloyds issued the circular giving more detail of its takeover plans, HBOS said it had taken a 5.2bn hit from toxic assets and bad loans in the first nine months of the year – compared with 2.5bn in the first six months of 2008.
Both HBOS and Lloyds – which will be known as the Lloyds Banking Group after the takeover – said market conditions remained tough as economic growth slowed.
Lloyds warned of a "substantial" drop in its nine-month profits, while HBOS, Britain's biggest mortgage lender, gave no profits guidance.
James Hamilton, a banking analyst at Numis Securities, said: "Undoubtedly 2009 is going to be a complete horror story for all UK banks, with no exceptions."
HBOS's writedown and impairment losses included a jump in bad debts at its corporate banking arm – led by Peter Cummings, who failed to secure any of the top jobs in the proposed new Lloyds management team – to 1.7bn to end-September, compared with 469m at end-June.
Bad-debt losses in its retail bank rose to 1.2bn, compared with 720m at the halfway stage.
Lloyds said it expected to write down 300m on bad corporate loans in the second half and take a further 120m charge because of falling house prices.
The banks maintained that the takeover remained on track, and Lloyds said it expected to resume dividend payments after repaying preference shares taken by the UK government in 2009.
Banks taking cash from the UK government's 37bn bailout cannot pay dividends until preference shares have been redeemed. Lloyds had paid one of the highest UK dividends.
Eric Daniels, Lloyds chief executive, said the extra cost savings generated by Lloyds's HBOS deal would give it an advantage over other potential bidders rumoured to be waiting in the wings.
Daniels added: "We are one of the few organisations that are well placed to take over HBOS. It requires a lot of know-how as well as capital."
In a technical accounting move, Lloyds TSB also said it planned to write down assets held by takeover target HBOS by up to 10bn as it takes a more stringent view of its target's asset portfolio. However, Lloyds said this would be largely offset by positive adjustments on debt carried.
• Royal Bank of Scotland is also expected to announce a leap in toxic asset writedowns when it publishes the prospectus on its own 20bn fundraising this morning.