Scrutineer: Embarrassment factor

Published on Monday 21 July 2008 21:47

HBOS 264.5p -17.5p COMPANY2 XXXp -X.XXp

CLEARLY, the embarrassingly low take-up of HBOS's 4 billion rights issue is a depressing nadir for the group since its creation through the merger of Halifax and Bank of Scotland in 2001.

Arguably, the intangible negative impact on the bank, Britain's biggest mortgage lender, is greater than the tangible one.

After all, HBOS has got its money. Its balance sheet has been bulked up. It is the underwriters and sub-underwriters who will be licking their wounds and cursing the hedge funds who shorted the stock and drove it lower, in the now-fulfilled hope of being able to buy it cheaper after the rights issue was concluded.

But it is in the court of public opinion that HBOS has been dealt a blow and now faces a big challenge to regain credibility.

It is true that HBOS's fund-raising took place in a period of unprecedented volatility for banking stocks.

But you could really say that was the case any time over the past few months, and only a little more than a month ago the equally-embattled Royal Bank of Scotland got a surprisingly robust 95 per cent plus take-up for its much bigger 12 billion cash call on investors compared with HBOS's miserly 8 per cent.

Only last Friday Barclays managed to get 19 per cent support from its existing shareholders for its virtually simultaneous capital-raising with HBOS.

The RBS result, in particular, should give HBOS's board, led by chairman Lord Stevenson and chief executive Andy Hornby, pause for thought.

RBS was seen as having the disadvantage of pressing ahead and overpaying for ABN Amro despite the credit crunch falling like a bombshell last August, and investors were quite aware of all the looming integration challenges with the Dutch bank the Royal now faces. RBS also has an incomparably bigger presence in the deeply disturbed US market through Citizens than HBOS has, with significantly bigger subprime writedown as a result.

And RBS, whose shares have also bombed over the past year, also had the burden in getting its rights issue away of boss Sir Fred Goodwin confirming in many City minds via the ABN Amro deal that he is an acquisition-junkie.

Yet, despite all these apparent disadvantages, RBS still managed to get a much bigger response for its call for faith in the market than the more conservative, predominantly UK-centric HBOS.

Apart from the shorting issue, to some extent HBOS's rights issue "under-performance" compared with RBS and Barclays can be put down to its vastly bigger retail shareholder army.

That army spoke for 27 per cent of the shares, and in the current gloomy economic climate who could blame Joe Public from shunning an issue purely on financial grounds rather than it being any direct reflection on HBOS's management and strategy?

RBS and Barclays's shareholder base has nowhere near that direct "street" exposure to the darkening economy.

HBOS could also argue credibly that the volatility in banking shares got even worse over the past four or five weeks since RBS concluded its cash call.

But even allowing for those caveats, 8 per cent is still a take-up figure that won't fade from the collective memory fast.

Even greater attention than normal will be devoted to the bank's interim results statement next week.

Any sign of weakening core markets in the past couple of months will be seized on by the bears avidly. It's still hold-your-breath time.

CHILDREN's clothing and cheaper-priced pub offerings have been identified here recently as two of the more defensive sectors in the gathering gloom. Although not a massively publicly-quoted sector, Domino's Pizza results out yesterday suggest that we might add takeaway meals to that more insulated category.

Domino reported a 33 per cent jump in interim profits, as it said there was evidence customers were trading down from restaurants to the takeaway trade.

Even better, and plugging into the zeitgeist, online sales at the chain have soared 85 per cent and now account for over one-fifth of the business.

Overall like-for-like sales growth at Domino is an impressive-sounding 11 per cent.

Shares in the company have outperformed the FTSE All Share food producers index by a massive 44 per cent in 2008.

Even though much of that outperformance is in the price, as the gloom gathers, the stock may still have a little way further to go.