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No official word from HBOS on Monday regarding the plans for a rights issue at the bank with the “exceptionally strong balance sheet.” But the papers were in agreement: HBOS is finalising plans for a £4bn capital raising.

Is that enough? RBS put the frightners on last week by aggressively writing down its portfolio of mortgage-backed securities and leveraged loans. Hbos last year took a mere £227m hit to profit, against its Scottish rival’s latest £6bn effort. More writedowns ahead then.

But of particular concern for HBOS was the emergence of RBS’s Alt-A nasties. The portfolio that barely merited a mention at year end was written down by 50 per cent. HBOS meanwhile is sitting on a £7.1bn Alt-A book.

HBOS, with a core Tier 1 ratio of about 5.7 per cent, was always considered a possible rights issue candidate after RBS made 6 per cent its new gold capital standard. But the prospect of up to £4bn of losses to come, on a straight read across from RBS, put it in pole position to be the next bank with the begging bowl.

A consensus was emerging in the press on Monday that the writedown figure would be closer to £3bn. March surely the culprit again. Not an overly rosy take at year end, or kitchen-sink rights issue accounting of course.

Analysts from Cazenove last week ran the numbers on Hbos’ AAA-rated Alt-A and concluded that the bank was unlikely to see underlying losses related to defaults on its book. The bank’s portfolio is 77 per cent loan-to-value and benefits from subordination of 30 per cent, meaning losses would have to reach that threshold in the underlying loan portfolio before the notes suffer losses.

On a first reading, analysts at Pali argue that an HBOS raising looks less dilutive than the RBS variant. For HBOS, £4bn is 20 per cent of shareholders’ equity, against £12bn which was 27 per cent at RBS. With its higher capital ratios, HBOS can more credibly argue that it has not had its hand forced by regulators.

But an about-turn would still be hugely embarrassing after its light year-end writedowns and March’s faux outrage about rumour-raking short-sellers. It also raises the question of what happens to the bank’s dividend this year. Analysts at Numis on Monday were bemoaning the value destruction that a rights issue would involve. Better to go without a dividend this year, they argue, and avoid passing value directly to the banks underwriting an equity sale.

Related links
HBOS to raise up to £4bn from rights issue - FT.com
From criminal to comical at HBOS - Alphaville