Howard’s unorthodox riding style may yet cripple the black horse

December 12th, 2008

HOWARD Brown, the Halifax teller-turned-minor celebrity,  risks crippling his new steed, Lloyds TSB’s black horse, with his cavalier riding style.

HBOS’s trading update this morning is scary stuff. In what appears to be an exercise in “kitchen sinking”, HBOS has revealed that its balance sheet is in a far more perilous state than previously imagined. The bank said bad debts and losses on toxic assets have soared by two-thirds – from £4.8 billion to £8 billion – in the space of just one month.

Much of this is due to extraordinary stupidity and greed of Peter Cummings, the bank’s befuddled head of corporate lending, who astonishingly remains on the payroll despite his pivotal role in bringing down the bank.

It is just incredible that HBOS’s loan book should have deteriorated this rapidly and it is hard to tell how deep the damage is going to go.

Apart from anything else, this is going to burn a massive hole in the £11.5 billion capital cushion already extended to the bank by UK taxpayers. Analysts this morning suggested the figures will actually mean that the Lloyds TSB / HBOS superbank is almost certain to follow Northern Rock into full nationalisation. Simon Pilkington at JP Morgan Cazenove said that “the probability of nationalisation [of Lloyds, after completing the HBOS takeover] now feels uncomfortably high”.

The whole thing makes Gordon Brown’s determination to push through an anti-competitive merger for reasons of financial stability doubly absurd.

The announcement – well-timed to frighten HBOS’s shareholders into voting through the Lloyds TSB deal at a meeting in Birmingham later today and also to ensure that media coverage of the dire figures gets drowned out by news of the “historic” vote – reveals that the chickens have well and truly come home to roost for HBOS. According to Deutsche Bank analyst Jason Napier, it means that profits at the merged “superbank” will be wiped out for at least the next two years.

Unsurprisingly, HBOS sought to pass the buck for the sea of red ink which has overwhelmed its balance sheet. It would have us believe that deteriorating economic conditions are to blame. Of course, these have played a part. However the real reason the bank appears to be holed below the water line is because of its own irresponsible approach to lending, both to companies and individuals, during the credit bubble years. Come on guys, you may as well admit it, you’ve got little to lose except your bonuses!

The statement was accompanied by the sort of mealy-mouthed statements one has come to expect from this bank. The statement included useful information like: “Global market and economic conditions, UK recession and increasing unemployment will continue to present a particularly challenging operating and credit environment.” It also claimed that the government’s largesse to the failed institution (the £11.5bn capital injection plus access to the special liquidity scheme) means the bank is “confident in its ability to navigate through this difficult period”.

Previous experience — remember Hornby’s claims at the time of HBOS’s rights issue last year? — would suggest this might be taken with a pinch of salt. As the bad debts and asset write-downs will continue to escalate, it is Lloyds shareholders, and also the UK taxpayer, who are going to have to bear the burden for the incompetence and/or fraudulence of the bank’s board.

Now that the Lloyds takeover looks certain to go ahead, Lord Dennis Stevenson, Andy Hornby, Peter Cummings and their “colleagues” on the HBOS board must think they’ve been handed a get-out-of-jail-free card.

To view a selection of my earlier posts on HBOS, click below:

  1. Crosby sacrificed risk management on altar of HBOS’s growth Oct 29th, 2008
  2. HBOS: When did the rot set in? And were shareholders asleep at the wheel? Oct 2nd, 2008
  3. The management incompetence and cosy political stitch up that spelt curtains for HBOS Sept 29th, 2008

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