Profits plunge by 30% at HBOS as takeover rumours spook shareholders

HBOS chief executive Andy Hornby will come under renewed pressure this week when he is tipped to reveal half-year operating profits have plunged by as much as 30%.

The results will add to the bank's growing concerns after its share price was spooked by rumours on Friday morning that US investment bank JP Morgan is looking at putting together a consortium to buy the bank in the wake of its failed £4bn rights issue.

According to Keith Bowman, equity analyst at Hargreaves Lansdown stockbrokers, consensus in the City is pointing towards half-year operating profits of £2.65bn, down 29.5% on the same period last year. He said there are mounting concerns over arrears levels due to HBOS's exposure to the rapidly declining property market, particularly to the riskier buy-to-let and self-certification mortgage markets.

Mamoun Tazi of Man Securities fears other divisions, in particular HBOS's private equity portfolio, could offer further nasty surprises.

"We think the private equity portfolio will give them a fraction of what you have seen in the past," said Tazi.

Charles Stanley analyst Nic Clarke said: "We are not only concerned about the rapid decline in mortgage activity and UK house prices, but also that when one combines these factors with our negative view on unemployment, it is likely that HBOS's impairment charge will worsen significantly over the next two years."

The City is also keeping a close eye on the "overhang" of shares left with HBOS's underwriters after it was revealed on Monday that less than 9% of shareholders took up its £4bn rights issue. "We remain concerned about the significant supply 'overhang' that has been left with the underwriters and that further earnings downgrades are more likely than upgrades," said Clarke.

Hornby's problems following the embarrassing rights issue flop were exacerbated on Friday when reports emerged that JP Morgan had held talks with a number of potential partners, including Clydesdale Bank owner National Australia Bank, about joining a consortium to buy HBOS. The rumour was unconfirmed by HBOS and JP Morgan, and analysts were quick to point out that any takeover attempt amid the current liquidity crisis would be a "long shot".

But it set off further jitters among shareholders, and HBOS stock fell almost 5% in early trading, before recovering to 310p a share by close on the news that it was slashing mortgage rates.

However, Tazi said although the chances of a takeover are remote, it is not outside the realms of possibility. "The example of ABN Amro and its success – the way Merrill Lynch put everything together – leads us to believe it's possible," he said.

But, he added, if HBOS was to indicate it is up for sale, it is unlikely it would "go cheap", and the asking price would fall between 400p and 500p per share – one and a half times its current 'tangible book'. "If you look at what Santander paid for Alliance and Leicester, it was about one and a half times tangible book," he said.