Will HBOS ride out the storm with Lloyds TSB?

I’d hate to be a shareholder in HBOS, writes Merryn Somerset Webb. But do depositors have any reason to worry? No - some things really are too big to fail. In the US it was AIG. And in the UK it has got to be HBOS.

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"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.

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Merryn Somerset Webb
Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.

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