Writedowns breach £1bn but HBOS standing firm on £4bn cash call

Published on Thursday 19 June 2008 21:44

HBOS unveiled a £100 million writedown on its equity investments in Britain's battered housebuilding sector yesterday as it formally launched its £4 billion cash call via a posted prospectus to two million private shareholders.

It came as Andy Hornby, the Edinburgh-based bank's chief executive, admitted that, historically, there was a greater proportion of rights issue shares left with underwriters where issuing companies had bigger private shareholder bases.

Of such a "rump" of HBOS shares being potentially left with the underwriters, he said: "I would rather it did not happen." But he added: "Companies with large private shareholder bases would expect to have slightly higher rumps with rights issues."

Hornby stressed to The Scotsman that the bank was "not for turning" on the cash call, however. He said it remained fully underwritten and that banks with strong capital bases would have a competitive edge in the deteriorating economic climate.

Hornby said HBOS's accompanying trading update showed resilience and "should put fears to rest" among many shareholders considering whether to support the rights issue. Despite that, the shares slumped 7 per cent.

Rival Royal Bank of Scotland recently got a 95 per cent-plus take-up of its 12bn rights issue as major institutional investors supported it.

Hornby said he felt the housebuilding industry was so much under the spotlight that HBOS was bound to get dragged into writedown speculation "because we have done a few high-profile deals".

The bank has taken a 50 per cent stake in Crest Nicholson, 20 per cent in retirement home group McCarthy & Stone, as well as significant stakes in the likes of Miller Group and Tulloch in Scotland. It gave no writedown figure on its lending to the sector.

The housebuilding writedown was half the 200m overall writedown on the corporate investment portfolio. Writedowns in the bank's treasury trading book rose 58m to 1.03bn.

Hornby said HBOS's current exposure to the housebuilding sector, including lending and investment, was 4.2bn.

But he said only 3 per cent of its corporate loan book advances were to housebuilders. Asked if there would be higher hurdle rates to taking further equity stakes in housebuilders in future, Hornby said: "Hurdle rates will be higher. We are being cautious right across the board on hurdle rates; it is not just applicable to housebuilders."

HBOS's shares fell 7 per cent to 296.75p – compared with a rights price of 275p – as the bank said it believed UK house prices would fall 9 per cent in 2008, and that arrears were on the rise. But Hornby said the bank had provided reassuring guidance to the market that the treasury book was virtually unchanged from the first quarter of the year and margins were stabilising.

He added that this was "certainly the most challenging" environment he had seen in his nine years in banking and that colleagues on the HBOS board had seen in 30 years.