Time to get that picture of stick out again.
HBOS - like several of its British banking peers - was in freefall on Wednesday, down 19p, or 7.3 per cent, at 241p.
Its £4bn rights issue closes on Friday. With the new stock being offered at 275p it is safe to assume there will not be many takers. In fact the only acceptances are likely to be from those (mainly retail) shareholders who have already sent in their forms.
What’s the likely take-up? On Tuesday, JPMorgan Cazenove suggested a figure of 60-80 per cent - a projection the house might want to revisit.
Indeed, £2bn or more might get left with the underwriters. Will this be a place-able “rump” or a “stick”?
Either way, analysts reckon shares in HBOS are simply catching up with the view in the debt markets, where participants continue to fret about fair value adjustments to the £78bn of debt securities sitting in the HBOS treasury division becoming permanent.
There’s also the little matter of falling UK house prices. From Cazenove:
14% of HBOS’ mortgage book has an LTV over 80% based on the most recent securitisation data (a sample representing 45% of the total) and therefore £33bn of the book is vulnerable to negative equity if house prices fall by 20%. This would lead to a double effect on the group’s capital from a higher impairment charge (higher loss given default) and higher risk weighting from the pro-cyclical effects of Basel II. Another 22% or £52bn has an LTV between 70-80% and so vulnerable if house prices nationally fall 30% as they did in several regions in the early 1990s.
And a growing sense that liquidity will once again become a key issue:
Customer deposits provide only 42% of total group funding of £512bn (including conduits), leaving it reliant for £297bn from the wholesale markets. We feel that this issue had subsided in importance in recent months but that the continued tension in the credit markets and, in our view, the recent speculation about the possible disposal of HBOS Australia has seen liquidity begin to return as an investor concern. We feel the relevance is that it restricts HBOS’ ability to grow to its level of success in attracting customer deposits; the June trading update suggested little overall growth with some encouraging progress on retail deposits after a dull first quarter but corporate deposits were unchanged. Thus far, HBOS remains confident the net interest margin will begin to recover from the second half of this year as the re-pricing of assets begins to work through. The risk is the continued rise in the cost of both deposits and wholesale delay that recovery.
Related links:
Is the world’s largest rights issue in deep, deep trouble? - FT Alphaville
