Photo: Amelia Calvert
How HBOS ran out of road
Halifax Bank of Scotland — created from the expedient merger of Halifax and “Governor & Company of the Bank of Scotland” in September 2001 and known as HBOS — is today in its death throes.
If the BBC’s business editor Robert Peston is to be believed, the bank is about to be subsumed into the Lloyds TSB group with a deal announced as early as tomorrow.
HBOS was always the most vulnerable UK bank following the collapse of Northern Rock.
A range of factors have caused the bank’s effective demise but pivotal ones included its growth at any cost strategy and culture and the lack of experience of its chief executive Andy Hornby.
Other problems included the cavalier approach to lending of senior executives like bank’s chief executive of corporate lending Peter Cummings, who seems to have forgotten that property bubbles do eventually burst.
His inexplicable largesse towards incompetent and greedy property developers and other business wannabees is likely to store up some serious problems in the coming months and years.
An over dependence on wholesale funding left the bank saddled with the highest loan-to-deposits ratio of any UK bank —177% — at the worst possible time. In the wake of the bankruptcy of Lehman Brothers, its Libor-linked funding costs increased hugely, which created severe doubts over the bank’s future as short-term wholesale funding dried up.
Then there was the bank’s exposure to subprime. HBOS’s asset-backed securities were last valued at £37 billion, of which £6.6 billion are Alt-A or “liar loan” assets, which are ultimately dependent on the propensity of impoverished Americans to repay their home loans. As the US property market continues to deterioriate, this has been diminishing by the day.
HBOS, whose shares plunged to a low of 88p just after 9am this morning, had left itself with few alternatives other than to fall into the arms of a stronger bank. As I write at 11.30am, the shares continue to bounce about on investor scepticism that the Lloyds TSB rescue takeover will actually go ahead.
Although the deal probably had to happen, it does seems strange from a number of perspectives. First of all what about the monopoly/competition considerations (apparently the merged entity will have some 50% of UK retail deposits)? Also, it does seem odd that a comparatively prudent organisation such as Lloyds should be prepared to take on a reckless basket case such as HBOS.
However, I suppose thanks to the best efforts of the short-sellers over the past three days, Lloyds has been able to pick up HBOS and its ‘assets’ relatively cheaply, and will gain a commanding presence in the UK retail and small business space if a deal occurs. Remember that supposedly all-knowing City of London investors were valuing HBOS’s shares at 1153p as recently as February 2007.
Had the story that Lloyds was in “advanced talks” with HBOS not surfaced at 9.30am this morning, I suspect there would almost certainly have seen the Northern Rock-style run on Halifax Bank of Scotland accelerate. That is clearly something the UK government, led by prime minister Gordon Brown and chancellor of the exchquee Alistair Darling, the Bank of England and the regulatory authorities wanted to avoid, almost at any cost.
There can be little doubt they have acted as marriage broker — or angry father-in-law — in the current shot-gun wedding.
This blog post was written on Wednesday, 17 September 2008, the day before Lloyds TSB formally announced its rescue takeover of HBOS and two days after the bankruptcy of Lehman Brothers