HBoS asks investors for £4bn cash boost

HALIFAX Bank of Scotland has today become the latest financial heavyweight to ask shareholders for extra funds to help it through the credit crunch.

The Edinburgh-based banking giant has launched a £4 billion rights issue, following in the footsteps of city rival Royal Bank of Scotland, which asked shareholders for £12bn last week.

HBoS, the UK's biggest mortgage lender, also announced it had written off another £2.8bn in the value of assets affected by the current economic turmoil.

But the bank added it had not written off the money permanently and expected it to be recovered when economic conditions improved. It announced the rights issue as it bids to strengthen its balance sheet with economic conditions expected to become more challenging.

But it also wants to be in the position to attract new customers and believes the extra funds can help it do so.

More than two million of the bank's smaller shareholders face paying out to maintain their stake in the bank in the rights issue.

Under the terms of the deal, they will be offered two new shares at 275p for every five held.

Chief executive Andy Hornby said the move would help boost the bank's core tier one ratio – a key measure of how well-capitalised a bank is – to between six per cent and seven per cent. Investors will also receive an interim dividend in shares as HBoS looks to conserve its cash.

Mr Hornby said: "The proceeds of the rights issue should ensure we benefit from strong ratios even if the macroeconomic environment deteriorates further. In the long term, we remain optimistic about the fundamental prospects for our core businesses."

HBoS also described trading as "challenging" during the first three months of the year as the credit crisis impacted on the wider economy.

The firm, which supplies one-in-five new mortgages, is taking a cautious approach to unsecured lending and expects a "modest" increase in bad debt charges at its retail business.

Among assets effected by the writedown are mortgage-backed loans, debts, personal banking accounts and student loans.

The bank's forecast of UK growth of between 1.25 per cent and 1.5 per cent in 2008 is well below official Treasury estimates and the predictions of most economists, despite a "fairly resilient" UK economy.

Mr Hornby, who expects a stronger second-half performance from the bank, said single-digit falls in house prices were likely both this year and next.

He added: "The capital raising announced today will provide us with financial resilience in challenging economic circumstances."

The decision to move forward with the rights issue had been a unanimous board decision, he said. It was expected to face tough questions at the firm's annual meeting in Glasgow today.