HBOS £4bn cash call turns up the heat

Bradford & Bingley and Alliance & Leicester were seen as the most likely next in line, after Barclays said last week it had no immediate plans for a rights issue.

One analyst said yesterday: "With RBS and HBOS now having gone to the market, shareholders in the other major banks will be asking whether they need to take this sort of capital decision as well."

The Halifax and Bank of Scotland group, which has about 17 per cent of the home loans market, also wrote down 2.8bn on toxic treasury asset investments hit by the credit crunch. That compared with a write-down of 736m for the whole of 2007.

The rights issue had been flagged since Royal Bank of Scotland made a 12bn cash call on shareholders last week – the biggest-ever British rights issue.

Andy Hornby, HBOS chief executive, said: "We are planning for a more challenging environment ahead, and the proceeds of the rights issue should ensure that we benefit from strong ratios, even if the macroeconomic environment deteriorates further."

Hornby said the group had considered the alternative of asset sales to raise cash – remarking "you never say never" – but he added that the likes of Australian subsidiary Bankwest, the 60 per cent-owned St James's Place wealth management group and pensions provider Clerical Medical were all doing well.

"HBOS is an homogeneous business; we are not a big diverse conglomerate. Our judgment was that it was not in the interests of shareholders to make disposals of quality businesses," Hornby said.

The bank, which yesterday held its annual general meeting in Glasgow, is offering its two million shareholders – a legacy of Halifax's former building society status – two new shares for every five existing shares at 275p each. That is a 45 per cent discount to Monday's close of 495.75p, similar to RBS's rights issue discount.

As a result of the rights issue, HBOS's core Tier 1 capital ratio, a key measure of banking strength, will rise to between 6 and 7 per cent. The ratio was 5.7 per cent at the end of 2007.

HBOS said it was to pay its interim dividend this summer in shares in a further move to conserve capital, although it still planned to pay the 2008 final dividend in cash.

The bank added that it would cut its dividend payout ratio to 40 per cent from 46 per cent, to "reflect a prudent view of the expected ongoing capital requirements of the group".

By comparison with the grilling faced by RBS's directors last week, the HBOS board escaped relatively unscathed at yesterday's gathering of more than 500 private shareholders.

The AGM got off to a shaky start when the news that Hornby and finance director Mike Ellis were not going to appear in person but would be beamed from London prompted one angry shareholder to walk out. The shareholder shouted: "They should be here – I'm leaving in protest," and stormed from the auditorium at Glasgow's SECC.

Board chairman Dennis Stevenson said: "I regret that he's not staying. Can I say that they are very disappointed not to be here but it's massively in the interest of the company that they stay in London this morning."

But subsequent reaction from investors was more measured.

One shareholder, Bill Duncan, of Ayr, said: "I didn't think it made much difference that he was in London. We could still hear him and he could answer questions."

Hornby, who was visible throughout the whole meeting, sitting alongside Ellis in front of a backdrop of the London skyline on a large screen above the stage, answered a total of four investors' questions – unlike his RBS counterpart, Sir Fred Goodwin, who came under fire last week after taking only one query from a single shareholder.

One woman attacked the board for the "lots of zeros" they had on their salaries, dubbing the financial world "gherkin land" after the famous London building.

But while several issues were raised at the meeting – from the viability of HBOS' buy-to-let mortgages to individual shareholder queries – little was said about yesterday's rights issue announcement.

BEAKING DOWN THE ISSUE

HBOS's two million private shareholders will have a major part to play in the company's 4 billion rights issue.

What can such shareholders expect to get from their holding in the firm?

Shareholders will get two new shares for every five that they already own – at a reduced price of 275p. They can therefore work out the number of new shares they will be entitled to by dividing their current shareholding by five and then multiplying by two.

If shareholders choose to buy the new shares, their stake in the company will remain the same as it was.

If they choose not to take up the rights issue, the proportion of the company they own will drop slightly.

Private investors who decide not to take up the rights issue can allow the bank to sell their entitlement on their behalf.

HBOS is to publish a prospectus for the rights issue in late June, which will outline the timetable for the process.