ANALYSTS at investment bank Credit Suisse have joined the rising chorus of doubters over Lloyds TSB's emergency takeover of HBOS as shares in the two companies sank again yesterday.
Credit Suisse analysts said the banks' combined exposure following the proposed takeover to more than £200 billion of UK specialist mortgages, unsecured lending and commercial property could increase its risk-weighted assets by more than a quarter, h
itting its capital ratios.
The analysts also warned that there was a danger for Lloyds TSB shareholders of HBOS trying to renegotiate the deal, which sees its shareholders taking 42 per cent of the company while contributing 70 per cent of the tangible equity.
A growing number of HBOS shareholders, including Schroders and Standard Life, have complained that the HBOS directors sold out too cheaply.
Credit Suisse analysts argue against HBOS getting better terms, saying that while liquidity for very short-term borrowing has improved, longer-term borrowing prospects were still precarious.
Yesterday, amid global market worries surrounding the outcome of negotiations over the US administration's $700 billion (£381bn) deal to buy-in the toxic assets of America's banking system, shares in Lloyds TSB tumbled 8.1 per cent to 251p while HBOS fell 5.8 per cent to 173.3p.
There is a glaring gap between the Lloyds TSB paper swap terms which effectively price HBOS at 211.9p and the current HBOS share price.
The Credit Suisse analysts join a growing number of assessments questioning the deal.
On Thursday, Deutsche Bank analyst Jason Napier downgraded Lloyds TSB shares to a "sell" as he raised doubts about the bank's capital strength if the HBOS takeover goes through.
Deutsche Bank, explaining its decision to change its previous "hold" recommendation, said that "in buying a much larger bank Lloyds TSB is importing HBOS's problems. Funding for the merged bank will be harder to raise, not easier, given counterparty limits."
Napier said in a note that Lloyds' capital strength would be stretched partly by taking on an additional £334bn of property-related lending.
Napier added: "Short term, we expect risks over loan losses and balance sheet recapitalisation by equity issue or asset sale will trump the very significant synergy benefits of the acquisition."
Deutsche said its new target price for Lloyds's shares in the short term is 200p, down from 250p.
On the plus side, Deutsche estimates that the cost saving and revenue benefit synergies available to Lloyds from the takeover would be 50 per cent higher – at £1.5bn – than the figure of "at least £1bn" given by Lloyds chief executive Eric Daniels last week.
Napier said that Lloyds' acquisition of HBOS would "create a bank with virtually unassailable market share". He continued: "If management are able to produce significantly higher capital ratios in the short term, by asset sales, capital increase, or both, we would see fundamental upside to the shares based on medium term earnings."
Treasury select committee chairman John McFall told The Scotsman the committee is to look at the Lloyds takeover of HBOS. McFall, a Labour MP, said: "The Select Committee is looking at the issue of financial stability and transparency, including the events of the past few weeks. It will include the merger of Lloyds and HBOS."
McFall also said he was not adding his voice to those who believe HBOS might have avoided takeover if the Financial Services Authority had banned "shorting" of financial stocks earlier than last Thursday and the US Treasury toxic debt initiative – still working its way through Congress – had been concluded sooner.
"I think there's hindsight in that (judgment], but there were a number of contributory factors (to HBOS's situation]," he said.
The full article contains 614 words and appears in The Scotsman newspaper.
