LONDON (Reuters) - British bank HBOS <HBOS.L> said profits should rise 4 percent this year but flagged a 180 million-pound ($368 million) hit on the value of assets due to the credit crunch and a squeeze on margins, knocking its shares.
By Steve Slater
LONDON (Reuters) - British bank HBOS <HBOS.L> said profits should rise 4 percent this year but flagged a 180 million-pound ($368 million) hit on the value of assets due to the credit crunch and a squeeze on margins, knocking its shares.
HBOS, Britain's biggest mortgage lender through its Halifax brand, said a deepening credit market crunch will force up its cost of borrowing by between 60 million and 70 million pounds in the second half of this year.
Finance Director Phil Hodkinson said second half retail profit which had been expected to match first-half levels of 1.04 billion pounds would be dented by 60-70 million.
!ADVERTISEMENT!By 7:08 a.m. EST, HBOS shares were down over 7 percent at 773.5 pence, one of the weakest UK stocks, which dealers attributed mainly to further pressure on its margin.
A rise in the cost of funding since a credit crunch deepened in August will hold back income growth in the second half and result in a "slightly lower" group margin for the year than previously indicated, HBOS said.
In August, it said the 2007 group margin was likely to fall 7-8 basis points from the 2006 level of 1.72 percent.
"Corporate is going well, international is going well and UK Retail is pretty much in line but with the issue of funding it is a little bit worse ... the funding issue is going to affect margins," said Mamoun Tazi, analyst at MF Global.
Hodkinson said if funding costs remained high it was likely to be passed on to consumers through higher mortgage payments.
Analysts said with costs likely to stay high for several months it would constrain growth for HBOS and other major UK lenders in 2008.
Concerted action by central banks announced on Wednesday to improve liquidity in financial markets is unlikely to provide a quick fix, analysts said, and shares in Barclays <BARC.L> and Royal Bank of Scotland <RBS.L> each fell over 4 percent.
HBOS, Britain's fourth biggest bank, said it expects market turmoil to continue in the short term and it "will remain prudent" in its lending.
The bank said its net UK mortgage market share is expected to be 17-18 percent in the second half of this year. Its net market share slumped to 8 percent in the first half, down from its traditional share of 20 percent, as Northern Rock <NRK.L> aggressively grabbed business before a funding crisis forced it to near collapse in September.
It has bought back 500 million pounds of shares this year, but will not start a new buyback programme until there is greater certainty about market conditions, it said.
SAVINGS BOOST, ASSETS HIT
HBOS's savings growth had been strong, helped by withdrawals from Northern Rock, and the bank said it had attracted savings inflow of 1 billion pounds in November alone.
The bank said profits from the sale of assets in its Corporate unit would be higher in the second half than the 392 million pounds a year before and would swell profits by about 1 billion pounds in 2007, analysts estimated.
The bank marked down the value of its traded investment securities by 180 million pounds, mainly due to floating rate notes and asset backed securities.
The loss was less than at Barclays and RBS, which have big investment banking businesses, and slightly less than at Lloyds TSB <LLOY.L>, another domestically-focused bank.
HBOS also wrote down reserves related to investments in its banking book by 340 million pounds, but this will not have an impact on reported profit or capital.
It said bad debts on unsecured retail loans will be lower in the second half than in the first half, but its insurance unit's 2007 profit will be cut by 140 million pounds from the impact of weather-related claims in June and July.
HBOS said its international businesses, in Australia and Ireland, would deliver a "strong" profit performance, underpinned by good growth in assets and deposit funding.
Underlying 2007 pretax profit is on track to meet forecasts, which averaged 5.78 billion pounds according to a poll of 17 analysts by Reuters Estimates before the update, up from 5.54 billion in 2006.
(Editing by David Cowell)
