Not a facetious question. The trading update from HBOS on Friday has focused minds - including that of Jason Napier of Deutsche Bank, who has now slapped a “sell” recommendation on HBOS’s saviour, Lloyds TSB. Mr Napier’s target price has also been chopped from 180p to 110p, against a market price of 126p on Wednesday.
You see the problem is that followers just can’t get a handle on how quickly the HBOS loan book is deteriorating - or how deep the damage might eventually go. Consider this table (click for a sharper view).
The really scary line is for corporate bad debts which — incrementally and in terms of basis points — have exploded from 83 at the end of June to 810 at the end of November. Impairments here appear to already be higher than the peak corporate loan losses seen in the early 1990s - and yet corporate defaults across the economy as a whole have only just begun to spike higher.
This, and an accompanying spike in mortgage impairment rates, invites Mr Napier to reach one of two binary conclusions:
(1) The UK economy and its corporates in particular are delivering loan losses well above the peak of the last recession and force a significant increase in loan loss estimates relative to our previous forecasts; or (2) HBOS’ loan loss provisions are substantially driven by a weaker-than-peer loan portfolio, a need to re-provision for existing loans-in-arrears and a potential desire to provision more comprehensively before the acquisition of the bank by Lloyds TSB.
The upshot here is that Deutsche reckon profitability at the merged Lloyds-HBOS will be all but wiped out for the next two years:
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