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Mortgage and business customers of HBOS are having increasing difficulty making loan repayments, causing a dramatic rise in bad debts at the troubled banking group, which warned today that its debts would jump even higher as the economy deteriorates next year.
As its embattled board prepared to address shareholders at an extraordinary meeting in Birmingham today, the bank also admitted its margins were coming under pressure from the fall the Bank of England's official base rate to a 57 year low of 2%.
Its shares slumped 11% to 78p in early trading, and the dismal statement also knocked 9% off Lloyds TSB. Royal Bank of Scotland, which has already accepted a £20bn taxpayer bail-out, tumbled 12%.
Despite the gloomy outlook, HBOS insisted it was "confident it could navigate through this difficult period" when it will be consumed by larger rival Lloyds TSB in a rescue takeover.
HBOS, owner of the country's largest mortgage lender, Halifax, will also have to set aside £200m next year to make its contribution to the Financial Services Compensation Scheme. This covers payouts to savers of collapsed Icelandic banks.
Its level of bad debts on mortgages and unsecured lending has risen in just two months. Since September, the charge for mortgage customers has risen from £400m to £700m and for customers with unsecured loans arrears reached £1bn, up from £800m.
It said: "In light of the worsening economic climate, trends in retail impairment charges are likely to come under further pressure."
There has been a major deterioration in its corporate book – exposed to property and the retail sector – to £3.3bn compared with £1.7bn in September
HBOS said: "Global market and economic conditions, UK recession and increasing unemployment will continue to present a particularly challenging operating and credit environment.
"Lower interest rates should ease the debt burden but exert further pressure on net interest income. These factors will impact on HBOS capital ratios."
The dire warning from HBOS will pile pressure on Lord Stevenson, the outgoing chairman of HBOS, who was already braced for a bruising encounter with shareholders of the embattled bank when he asks them later today to back an £11bn bail-out from the taxpayer and the emergency takeover by Lloyds TSB.
Shareholders may hope to extract a public apology from him and chief executive Andy Hornby for the collapse in the value of the shares, which are down more than 80% from their peak last year.
Today's meeting at the NEC in Birmingham follows attempts to derail the deal by Scottish business people who were concerned about the impact on the local economy, dominated by HBOS subsidiary Bank of Scotland.
The Competition Appeal Tribunal this week threw out a challenge to the decision by the business secretary, Lord Mandelson, to clear the takeover in the interests of financial stability even though it would breach conventional competition rules to create a bank which dominates the high street with more than 3,000 branches.
Up to 40,000 jobs from a combined workforce of more than 140,000 are at risk from the takeover, which was brokered by Gordon Brown in the days following the market mayhem caused by the collapse of Lehman Brothers in September.
Staff from both HBOS and Lloyds are expected to demonstrate outside the meeting and are planning to wear T-shirts saying "secure jobs = secure bank" to remind shareholders that the voice of employees should not be ignored.
"Months of unremitting speculation about the future of HBOS has left long-serving employees feeling insecure in their jobs in an organisation they are very faithful to," said Derek Simpson, joint general secretary of union Unite.
Shareholders, some 25% of whom are private investors handed the shares when Halifax demutualised in 1997, are being asked to back a £8.5bn offering of ordinary shares plus the issue of £3bn of preference shares to the government.
No member of the current HBOS board is joining the board of the combined bank when the deal is completed next month. Hornby, though, who became chief executive two years ago, is being offered a consultancy role.
HBOS needs votes from shareholders representing 75% of shares for the capital raising and the acquisition - although for the takeover it must also win support from a simple majority of shareholders as well.
Assuming the takeover of Lloyds TSB goes ahead, the taxpayer is expected to own almost 45% of the combined bank which will be called Lloyds Banking Group.
- HBOS
- UK banking sector
- Lloyds TSB
- Credit crunch
- Royal Bank of Scotland
- Recession
- Banks and building societies
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