INVESTORS are expecting HBOS to unveil another writedown in assets tomorrow amid speculation that it needs to tap the market for up to £4bn in a rights issue.
It would be the second Scottish bank in a week to seek further funding, following Royal Bank of Scotland's £12bn cash call. Other banks, headed by Barclays, are still to decide whether they need to ask shareholders for funds.
Halifax Bank of Scotl
and is expected to clarify its position tomorrow ahead of Tuesday's annual general meeting in Glasgow, and brokers are divided on whether it needs a rights issue or whether it can rely on organic growth to strengthen its balance sheet.
The company is due to confirm another markdown, which risks weakening its key equity capital ratio, known as tier 1. This is the cushion which banks are required to hold, and for HBOS it is 5.7%, comfortably ahead of RBS, which is just above 4%. But all banks are keen to close in on the European banking average of 6.5%.
It was a requirement to bolster its balance sheet that forced RBS into a rights issue, a move that will take the ratio above 6%.
With the capital base stronger at HBOS, analysts say it could avoid a rights issue. James Chappell at Goldman Sachs sees both HBOS and Barclays attempting "organic capital generation" to maintain and build capital ratios. But the decision could swing towards a rights issue if there was evidence of "permanent impairment to earnings".
"We estimate it (HBOS] could have to write down £5.4bn and, in order to restore its equity tier 1 to 6.1%, it could have to raise £4bn," he said in a newly published circular. He estimates that Barclays may need £5bn.
HBOS chief executive Andy Hornby is expected to give a robust defence of the group's strategy on Tuesday following the bear raid in March which saw billions wiped off the bank's value. He will provide a trading update which is also likely to confirm the weakening of the banking sector in March.
As Britain's biggest mortgage lender, his guidance on the homebuying market will also provide a key pointer to the months ahead. With housebuilders in the doldrums and Persimmon abandoning plans to build on new sites, the outlook is unlikely to be much better than cautious.
Rumours have swept the market in recent days that Barratt Developments will also announce a heavily discounted rights issue tomorrow.
Speculation over Royal Bank of Scotland's insurance business continues to focus on a £7bn trade sale or private equity buyer. The bank is considering three options: sale of the whole division – which includes Direct Line, Churchill and Privilege – to one buyer, the sale of a stake, or a break-up.
Aviva, owner of Norwich Union, has ruled itself out, leaving a list headed by AIG, Axa and Generali.
One source said Prudential could bolster its under-strength UK operations by acquiring the division. Another source has speculated on RBS floating the insurance business in a move that could raise £10bn.
The full article contains 518 words and appears in Scotland On Sunday newspaper.
