SCOTTISH banking giant HBOS announced plans to cut 650 jobs yesterday, as its share price crashed to a new low – only hours before its £4 billion rights issue closes.
Shares in Britain's biggest mortgage lender plummeted to well below the 275p it was offering in its rights issue as the growing US economic crisis jangled investor nerves on this side of the Atlantic. The share price fall means the bank's valuation
has dropped by about £28 billion since July last year.
Last night, analysts were speculating on whether HBOS may have to sell assets to shore up its balance sheet and cut costs further.
Many of the nation's pensions and ISA investments are with the FTSE 100 firm, and a share price drop will mean these are immediately hit.
Experts also said such low prices made Britain's fifth-largest bank ripe for takeover – a move that could rip its headquarters, and all the economic benefits that brings, out of Edinburgh.
Tomorrow is the final deadline for the rights issue, under which existing shareholders were offered stock at almost 50p more than what it was worth at its lowest point yesterday. The plunge means the underwriters to the deal, Dresdner Kleinwort and Morgan Stanley, will probably be forced to take on the remaining shares.
Analysts warned this would lead to unwanted shares that the new owners would be desperate to get rid of. This could force the price down further.
HBOS says up to 650 jobs across the UK will be cut over the next 18 months as part of its plan to merge two of its business banking divisions. It is bringing together its 1,000-strong business banking arm, part of the retail division, with its commercial business section, part of the corporate division, to create one single unit focused on small and medium-sized businesses.
The bank said a further 350 staff within the enlarged division would be transferred to alternative roles in the group.
"The aim is to achieve this through further redeployment, voluntary severance and normal turnover in accordance with the job security agreement," it said. " (The unions] Accord and Unite were consulted before this announcement and will continue to be consulted throughout the process."
Graham Goddard, Unite's deputy general secretary, said: "While it is encouraging that a significant number of alternative roles have been identified for the impacted staff, it still means that up to 650 people are likely to leave the company.
"Our priority is to ensure that the remaining staff are dealt with with dignity and that no compulsory redundancies will result from this reorganisation.
"Employees in the financial services sector are the subject of constant speculation as the economic environment continues to shift. Not only are Unite members in the finance sector under pressure as their jobs are under threat, our members are those who are having the toughest battle against rising food and energy prices."
Keith Bowman, an equities analyst at Hargreaves Lansdown, said: "The job losses don't come as any great surprise. I'm sure all the bank bosses will be doing their best to conserve capital, and reducing jobs is a way to do that."
By lunchtime yesterday, investors on both sides of the Atlantic were fleeing the banking sector amid a growing hysteria surrounding the collapsed United States bank IndyMac and the prospects for American mortgage giants Freddie Mac and Fannie Mae.
Royal Bank of Scotland, another key Scottish financial institution, saw its worth plummet to little more than half the £49 billion it paid for ABN Amro last year. Subscribers to the £12 billion RBS rights issue, which closed on 6 June, have already had more than 25 per cent, or £3 billion, wiped from the value of their investment.
RBS is particularly exposed because of its interests on the other side of the Atlantic – it has a US subsidiary, Citizens – and there were fears of further write-downs.
The credit crunch is a huge headache for HBOS – more than for many other banks – because it is a major lender and has lent to the troubled housebuilding industry. It is suffering both from mortgage defaulters and firms unable to meet their loan obligations.
Eric Spreng, manager of the Dunfermline branch of analyst Redmayne Bentley, said: "The willingness to lend historically with limited or irrational criteria is coming home to roost. It is the mistakes of yesterday which are coming out today as the world at large begins to realise the mistakes they have been making."
He said "several" of his clients were HBOS shareholders, but "scarcely any" had taken up the rights issue, as there was "no point". He said this meant that when the deadline passed at 11am tomorrow, there would be a large amount left that would fall to the underwriters.
Mr Spreng said HBOS's future was intrinsically linked to that of the property market – if the market collapsed and mortgage payments went up, the bank could suffer from a huge increase in defaulters. This would force it to write off debts.
He added: "I think the US is causing uncertainty and the stock market doesn't like uncertainty. I imagine it does not do the property market any good either."
Mr Bowman said there had been "a big fall off sector-wide" and he agreed the difficulties in the US mortgage market – particularly with Freddie Mac and Fannie Mae – had had an effect.
"We are also going into the second quarter reporting and there are some nerves over that," he said. "I suppose there are concerns about a series of write-downs from those banks.
"If we do see big write-offs from the British banks, they would be right across the sector. Some banks have subsidiaries in the US, like RBS, but banks also have investments over there."
He said share prices had rallied later yesterday because the oil price had continued to decline, and that had helped sentiment across the US economy.
"In the last few days, it's been extremely volatile, and that's continuing and may well continue for the next few days, given the reporting coming up."
The American economy has already proved a portent for the UK's in recent times, with the collapse of sub-prime lending in the US leading to the crisis over Northern Rock, which was eventually taken into public ownership.
Bill Jamieson - Major questions need to be answered as a once rock-solid company is left vulnerable and exposedJUST when the 2.1 million small investors in HBOS thought it could not get worse … it got worse.
Shares in the bank, changing hands at £10.22 a year ago, plunged another 8 per cent at one point yesterday, hitting a low of just 225p. A late rally saw this cut to 254.5p.
But with the deadline looming for a £4 billion rights issue at 275p a share, shareholder confidence has been stretched to the limit. What seemed a bargain price a few weeks ago has been swept aside in the ferment, with almost the entire issue now likely to be dumped on the underwriters.
It is a humiliating – and worrying – outcome for a company with the biggest private shareholder base of any in Britain.
And it can't be doing much for the customers. HBOS has 23 million of those – two out of every five households have an HBOS bank account, or mortgage or financial product.
What has brought it so low is its dominance of the UK mortgage market. It is Britain's biggest mortgage lender, with a 20 per cent share in what seemed until a year ago to be a surefire market and one of the safest areas of bank lending.
Not any more. The credit crisis has brought an era of easy lending to a shuddering close. Wholesale money markets have seized up, mortgage lending has slumped and house prices are tumbling.
With the economy slowing and unemployment climbing, bank analysts fear HBOS faces a big rise in mortgage arrears and repossessions, triggering a jump in bad debt provisions.
Business and corporate lending is also being hit, prompting the announcement yesterday of 650 job losses. Not only is HBOS exposed to the housing market through mortgages, but it has also been a big corporate lender to housebuilding companies. As mortgage lending has slumped, so, too, have house sales, triggering a wave of site closures and redundancies through the building industry. It is in crisis.
Worries about the health of the US housing market and its financial system have deepened in the past week. Shares in the country's two biggest mortgage providers – Fanny Mae and Freddie Mac – have collapsed. The Bush administration is under intense pressure to intervene and provide a safety net. Regional banks are already under pressure, adding to the mood of apprehension in financial markets.
It is these worries that have crossed the Atlantic and alighted on HBOS.
While the group's rights issue is underwritten and HBOS will get its money, the shares are likely to stay depressed because of the overhang of so many unwanted shares.
The one grim consolation for HBOS shareholders is that they are not alone. The Bradford & Bingley rights issue was a fiasco. Yesterday, shares in Barclays hit a ten-year low before rallying.
Shares in rival RBS also hit a new multi-year low yesterday. It raised a record £12 billion last month with a deep discount rights issue at 200p a share. But even with this money, shares in the group have carried on falling, closing at 165p.
A recovery now critically rests with an early resolution of the problems gripping America's two mortgage giants. Further falls in the oil price, which helped lift sentiment yesterday, would also help.
However, once a floor is established and a semblance of confidence returns, HBOS could well be vulnerable to a takeover bid, possibly from global banking giant HSBC.
There are major questions to be asked as to why HBOS allowed itself to become so dependent on the housing market and whether the current leadership of chief executive Andy Hornby will be right for the post-credit crunch era. Many Bank of Scotland loyalists fear the bank's reputation and ethos has been destroyed by the Halifax merger which has never been a stock market success.
This is no short, sharp shock. For HBOS, the latest plunge, softened by a late rally yesterday, points, at best, to a very long period of convalescence.
