“We’re heading into a storm not out of it,” or so George Soros told Newsnight last night. Soros isn’t always right but look at the share prices of our big banks and it is clear that the market agrees with him. This morning all eyes are on HBOS (LON:HBOS), owner of Halifax, Bank of Scotland and Intelligent Finance. The bank’s shares were down 40% at their worst yesterday. But could a bank like this really go bust? Well it could certainly find itself technically insolvent. The company is a great one for issuing statements saying it is a “strong bank” but rating agency S&P doesn’t think that rings quite true: it has downgraded its credit rating and pointed out that HBOS is “less well postioned compared with UK peers.”
Given the state of the UK retail banking industry and the housing sector it supports that doesn’t tell us anything good – note that HBOS has been heavily involved in the fast collapsing sub prime and buy to let mortgage sectors. The key problem here is – as ever – funding. HBOS gets only 60% of its funds from its depositors. The rest is borrowed in the wholesale markets. The FSA says the bank can “fund satsifactorily” but that’s the kind of assurance the market is surely getting used to ignoring. “We note” say S&P analysts with a degree of understatement “that earnings may be constrained by higher funding costs.”
But will it actually go under? No. HBOS is on every high street. It has 20% of the UK mortgage market. It holds the deposit accounts of 15m UK savers (the total population of the UK is not much more than 60m). It also has 2 million private shareholders. This morning news has broken of HBOS being in what the BBC calls “advanced merger talks” with Lloyds TSB. I’d hate to be a shareholder. A year ago the shares were trading at £10. Today? 190p. But if I was a depositor I wouldn’t be too worried. Some things really are too big to fail. In the US it was AIG. In the UK it has got to be HBOS.