LEX Why is HBOS doing a rights issue? After all, it is sitting pretty compared with most UK banks. Its core Tier 1 capital ratio at the end of last year was near 6 per cent, well above the 4 per cent that forced Royal Bank of Scotland to go begging to shareholders last week. Unlike banks more reliant on wholesale markets, HBOS can fall back on customer deposits for half its funding.
Sure, the bank says it is cautious on the outlook for the UK. It expects economic growth to be, at best, 1.5 per cent this year and next, and house prices to fall. HBOS is also downbeat on employment. But, even taking management at its word, the bank should have been able to generate capital organically. That is largely because loan spreads, from low levels, are actually rising. Instead, with a rights issue (and by not paying a cash interim dividend), HBOS’s core Tier 1 ratio could conceivably top 7 per cent by the end of the year.
That is high, given a lack of growth opportunities. There are two explanations: the first is that HBOS’s regulatory capital position is flattering. For a start, accountancy rules exclude the negative fair value adjustment of £1.9bn that HBOS took to its banking book; including it lowers the core Tier 1 ratio by 0.6 percentage points. And a post-issue tangible equity-to-assets ratio of 3 per cent still leaves HBOS, like many of its UK peers, in the bottom third of capitalised banks in Europe.
However, the main potential explanation for the apparent excess capital is that the board’s outlook for the real economy is worse than stated. Retail bankers’ ears are fairly close to the ground and should hear a train wreck from a distance. That HBOS’s adjusted 2008 price/earnings multiple is six times suggests that the market hears rumblings too.
