Another week, another U-turn in the banking sector. Only two months ago HBoS hiked its dividend by 18%, but now it is scrabbling for cash. This week it announced a £4bn rights issue, marked down the value of its complex debt securities portfolio by £2.8bn and reduced its dividend, which will probably be “well over” 50% lower this year, said Patrick Hosking in The Times.
Behind the move
HBoS’s core capital ratio – a gauge of banks’ capital cushion – was just under 6% before the rights issue, and should now rise to around 6.6%; the figure at Barclays is 5.1%. HBoS was “sitting pretty” compared with most UK banks before this week’s move, as Lex notes, so why the rights issue? It suggests the board’s outlook for the real economy is “worse” than the slowdown it has predicted: growth of 1.5% and single- digit house price falls this year and next.
One worry is further writedowns on its US mortgage-backed securities, which are worth around £10bn, noted Peter Thal-Larson in the FT; most are Alt-A mortgages (a step up from sub-prime). It has taken a smaller hit to profits than RBS, despite having more exposure to US securities, and the accelerating slide in US house prices hardly bodes well, as George Hay said on Breakingviews.com. But the key issue is the UK, where HBoS is the biggest mortgage lender and heavily exposed to rapidly weakening residential and commercial property. “Shareholders have to hope” the economy “doesn’t get into too much trouble”.
The outlook is worsening
But trouble abounds. Risk-averse banks continue to tighten credit, with Nationwide this week becoming the latest lender to require a minimum 10% deposit for new borrowers. The end of generous loans for buy-to-letters this week sent Inside Track, which lured unfortunate punters into the overheated market by promising they could become “property millionaires”, into administration. Tightening credit is crimping housing demand and undermining prices; mortgage approvals for new homes plummeted by an annual 44% to near-1992 lows in March, while Nationwide reported the first year-on-year slide in prices since 1996.
With the housing slide quickening, rattled consumers are cutting back. Retail sales volumes hit a three-year low, while consumer confidence is at a 16-year low.
House prices are falling about as fast as in the early 1990s, noted Capital Economics, which portends a further squeeze on consumption. The financial sector is also reeling and there is no scope for government spending increases, said Ian Campbell on Breakingviews.com, while manufacturing has barely grown over the past three years. What’s left to boost growth? A major downturn, which may well end in recession, has begun.