Headline: a £1bn writedown
A £2.9bn writedown:
The results for the first half of 2008, and the comparison to the first half of 2007, have been significantly affected by £1,095m (H1 2007 nil) of negative fair value adjustments (‘NFVA’) taken to the income statement in respect of debt securities held in the Treasury Trading Book. In addition, £1,916m of NFVA (H1 2007 nil) on a post tax basis were taken through equity in the Available For Sale (‘AFS’) reserve, which are not reflected in reported profit or regulatory capital.
Nothing, of course, particularly suspect about that move. Maybe though, banks should report “underlying” writedowns.
The hits HBOS has taken are principally against asset backed securities held on its books and in its Grampian ABCP conduit: the damaging stuff, predictably, being US mortgage bonds. In total, HBOS holds £22bn of US debt securities – mostly mortgage-backed.
There is also a £6.6bn exposure to CDOs. Fear not, however. For a start, £3.2bn are backed by loans. Of the remaining £3.4bn, only a tiny portion – £323m – are asset backed. The rest are (relatively) benign IG corporate bond-backed. In other words, unlike RBS or BARC, no readacross from the CDO mess at Merrill.
Moving on, capital ratios – the most critical measure of any banks security – have, post the rights-issue, increased. Before, HBOS had a Tier 1 reatio of 7.3%, core Tier 1 of 5.3%. After the £4bn cash call: Tier 1 is up to 8.6% and core Tier 1 6.5%.
All rosy? Not quite. There is one point which should be cause for consternation:
We continue to fund successfully in the wholesale markets. At 30 June 2008 41.4% of our wholesale funding matures in more than one year (end 2007 41.0%). Our asset growth will continue to be selective and, over time, we will grow the relative share of customer deposits in our funding mix.
HBOS continues to have a huge amount of debt which it must service. Around 58 per cent matures over the next year: a high rollover. And in the current climate, funding, be it from the BoE or the market, comes at a very high price. It might be optimistic, therefore, to expect any significant widening of net interest margins (currently down 3bp at 155bp) in the future.
Floreat HBOS, though, the divi shall be paid. For now, in new shares. But the final dividend will be in cash.
We believe that a payout ratio of around 40% is appropriate for 2008 and over the medium term, reflecting a prudent view of the expected ongoing capital requirements of the Group. We intend to pursue a progressive dividend policy, growing dividends in line with underlying earnings. We intend to pay the final dividend in cash, which together with the Capitalisation Issue results in around 40% of underlying profits attributable to ordinary shareholders being distributed.
Update Commenter Carlomagno below points out that HBOS in fact has around 58% of its wholesale funding maturing in the next 12 months. For those interested, the situation is even worse for some of the other UK banks (though of course, HBOS being essentially a local mortgage bank, the situation is somewhat more acute)
Related links
Slowdown takes toll on HBOS – FT
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