Halifax Bank of Scotland spread more gloom in the banking sector today as it revealed £1bn (€1.3bn) in write-downs and warned that house prices could now fall 9% this year.
The grim property price prediction – a near doubling of the bank’s previous expectations – will cause its bad debts to rise as more borrowers struggle with repayments, said HBOS.
Britain’s largest mortgage bank sparked share losses across the banking sector, itself down 6%, while fellow lending giant Alliance & Leicester dropped 6%, followed by Barclays and Lloyds TSB, both shedding more than 2%.
HBOS said trading was satisfactory and that it expected to put in a “resilient” performance in 2008 as it sought to reassure investors ahead of its £4bn (€5bn) rights issue.
The bank was forced to issue a statement last week insisting its cash call remained on track, despite its share price dipping below the discounted offer price.
But today’s update raised concerns with news of rising arrears amid the housing market woes and a further £58m (€74bn) in credit crunch write-downs since the end of March, taking the total so far this year to £1.03bn (€1.3bn).
The group’s forecast for house prices marks a steep decline from the bank’s previous estimate – made as recently as last month – for “mid-single digit” declines in 2008.
HBOS said its revised prediction reflected the UK’s slowing economy, a rise in unemployment and limited scope for interest rate cuts amid soaring inflation.
House sales are also set to plummet by 45% this year, cautioned the group.
It said arrears levels were increasing as expected, but admitted bad debt charges would rise as the property slump worsens.
Arrears levels for borrowers falling three months or more behind with repayments rose to 1.89% of total mortgages from 1.67% at the end of December.
Specialist mortgages, such as buy-to-let and self-certification loans, where borrowers self-declare their earnings, saw arrears levels increase from 2.59% to 3.09% in the past five months, said HBOS.
Retail profits this year will be cut by bad debts and increased costs of raising funds in the crisis-hit wholesale money markets, according to the group.
However, it is expecting a better second half performance, with the higher interest rates being charged on loans and mortgages helping boost income and margins.
“While HBOS is not immune from the global dislocation in financial markets that is impacting the wider economy and credit conditions, it is on track to demonstrate a resilient performance in 2008,” it said.
Citigroup analysts highlighted the arrears levels as a key concern and said the 9% revised property price prediction may still be too optimistic.
The HBOS trading update has been keenly awaited in view of its £4bn (€5bn) rights issue, with Bradford & Bingley’s fundraising move hitting trouble after a profits warning left the whole scheme in doubt, forcing the group to reduce the offer price and amount it was asking shareholders for.
HBOS is hoping to mobilise its two million strong army of private investors to stump up cash for the £4bn (€5bn) fundraising.
Appetite for the scheme was thrown into doubt amid last week’s share price fall below the 275p offer price, although the stock has since recovered above the threshold.
There have also been concerns over its exposure to the embattled housebuilding sector through a raft of investments in firms such as McCarthy & Stone.
The group today confirmed that it had £4.2bn (€5.4bn) in investments and loans to the housebuilding market, but sought to reassure that its exposure was largely in niche areas and not “volume-led” housebuilders, whose shares have been hammered in recent months.
HBOS also said it had secured a further £8.3bn (€10.6bn) in funding from wholesale markets since the beginning of the year.
The bank has been hit by the financial markets turmoil, posting lower than expected 2007 underlying pre-tax profits earlier this year, at £5.71bn (€7.25bn).
Bad debt charges last year rose 18% to £1.29bn (€1.64bn) and it also took a £227m (€288.5bn) hit from the credit crunch in 2007.