Move along. Nothing to see here. As expected, the UK’s largest mortgage lender is asking shareholders to stump up £4bn.
Yes, it’s the same bank that was outraged at suggestions barely a month ago that its capital position might not be top notch. But all the same, this fund raising has been leaked so far and wide over the past few days that it’s now a non-event.
Not quite. The HBOS rights issue hints at a sea-change for banking, involving the establishment of a new set of ground rules. HBOS is aiming to hike its core Tier 1 ratio from 5.7 per cent currently, towards a new target of between 6 per cent and 7 per cent. It’s going to see RBS’s 6 per cent target, and raise them.
A higher core capital ratio isn’t the only new rule. Interim dividends are scrip now – and HBOS is reducing its divi payout to 40 per cent. And it all means a 2-for-5 issue at 275p a share. That’s a 45 per cent discount to last night’s closing price, and Dresdner and Morgan Stanley are the lucky banks doing the business of underwriting the sale.
The HBOS issue is less dilutive, at 26 per cent, than RBS’s – but it means reducing the bank’s return on equity aspirations to the mid-teens against the 20 per cent benchmark it has set, and hit, over the past few years.
HBOS has been less forthcoming on its writedown marks than its Scottish rival, a stance that may disappoint some investors. The bank’s insistence on making “negative fair value adjustments”, implying that the value of these securities may yet miraculously bounce back, might also irritate.
But the headline figures are £970m through its trading book, which hits the P&L, and £1.9bn in the banking book, which goes into the available-for-sale reserve and doesn’t impact profits or regulatory capital. About half those losses seem to have come on HBOS’ £7.1bn Alt-A portfolio, which is split between the two books. The bank says it has been conservative in writing down its portfolio of US alt-A assets to about 80p in the pound. The only other nugget of detail is £180m of pre-tax adjustments taken against HBOS’ monoline exposure.
So why, ask some analysts, is HBOS raising £4bn? If the bank genuinely expects the value of its mortgage-backed securities to reverse and claw back losses over time, then why does it need that much? It could ask shareholders for less and still hit the lower end of its 6 to 7 per cent band.
The rosy spin is that HBOS is looking for growth, aiming to consolidate its leading mortgage position, seek out international opportunities and so on. The bank, notes Numis, does have a track record of investing counter-cyclically.
But the rights issue is also going to provide a cushion against a deteriorating economic backdrop and greater-than-expected house price falls, now forecast to be “mid-single digits” in 2008 and 2009. The bank may only be forecasting a moderate rise in impairments, but they are bulking up for worse – and hoping to look prescient either way.
Related links
HBOS statement
HBOS launches £4bn rights issue – FT.com