Profit margin fears wipe £2bn off HBOS

ABOUT £2 billion was slashed from HBOS's stock-market value yesterday as worries about squeezed profit margins at the Bank of Scotland/Halifax banking group overshadowed an 18 per cent leap in the dividend.

Britain's biggest mortgage-lender saw pre-tax profits fall 4 per cent to £5.47bn after taking a £227m writedown from the value of risky assets linked to the financial market turmoil.

The shares fell 10 per cent before later closing down 6.8 per cent at 657p, valuing the group at £24bn.

The writedown was £47m, or 21 per cent, higher than the guidance of £180m through to the end of November.

However, Andy Hornby, group chief executive, said yesterday that the bank had virtually no direct exposure to the subprime mortgage crisis.

Hornby said: "This number (the writedown] is very low in comparison to many of our peers. We don't have a financial markets business of any scale."

HBOS, whose full-year dividend rises 18 per cent to 48.9p via a 32.3p final, also took a £135m hit arising from the 2007 summer floods.

Hornby said the dividend largesse was "a step-change to our payout ratio" and would represent an average payout of £183 to the company's 2.1 million small shareholders.

However, City analysts were more concerned about a 13 per cent slide in profits to £2.05bn at HBOS's core UK banking arm.

HBOS said its net interest margin – the difference between the interest it charges on loans and the interest it pays on deposits – fell to 1.63 per cent for the year from 1.72 per cent.

The retail banking margin dropped 12 basis points to 1.66 per cent due to competitive pressure in the first half and higher funding costs in the second half.

Hornby said margin contraction in 2008 should slow to low mid-basis point digits.

HBOS, which employs 17,600 in Scotland, revealed that retail bad debts last year rose to £1.29bn (£1.09bn), but that the charge in the second half, at £616m, was lower than the £678m in the first half.

Hornby predicted Britain's net mortgage market will grow by between £80bn and £90bn in 2008, less than in recent years, and predicted HBOS would continue to write around 20 per cent of gross lending, near its traditional share.

But he added that, talking to estate agents, he agreed that UK mortgage transactions in the current climate were likely to be off 25 per cent this year.

HBOS's corporate lending arm boosted profits nearly a third to £2.3bn. Peter Cummings, chief executive of the division, said the gloom in the corporate lending sector was overplayed, and that "big-ticket items are in good shape".

Without citing individual sectors, Cummings said HBOS remained a selective buyer of assets "at all points of the cycle".

In recent times, the bank helped fund takeovers of housebuilders McCarthy & Stone and Crest Nicholson, and Cummings said recent falls in housebuilder share prices against the current volatile financial market backdrop had made them look more affordable again.

HBOS also has 8 per cent of retail billionaire Philip Green's Arcadia chain.

The group's international profits, ranging from Ireland to Australia, rose 23 per cent to £757m.

Insurance division profits rose 11 percent.

DIFFERENT CRITERIA
IN SHARE-price terms, HBOS undoubtedly provoked the most negative reaction of the three of the Big Five banks who have so far reported.

HBOS's 6 per cent share price fall compared with stock rises of 4 per cent at Barclays and nearly 5 per cent at Lloyds Bank when they reported last week.

The key difference was the relative performance of the core UK retail banking businesses of the three.

HBOS's retail profits were down 13 per cent, while Lloyds' were up 17 per cent and Barclays 19 per cent.

In the current nervous financial climate, HBOS's strong dependence on mortgages as the country's leading home finance lender is also seen as a weakness. Via Halifax, it has about a 20 per cent market share. As such, its profit margins are likely to contract further in 2008, if at a slower rate.