HBOS, the UK's biggest mortgage lender and the owner of the Halifax, shocked the City today with the admission that it had lost its battle to stop customers joining rivals for better deals during the first half.

HBOS initially briefed the market that its share of net lending was expected to fall below 10 per cent, but Phil Hodkinson, group finance director, later clarified with a warning to investors that the bank's mortgage share for the six months to the end of June would be "in the order of 8 per cent".

It is accustomed to taking between 15 and 20 per cent of new mortgage business. It is thought to have lost market share to Northern Rock, which has declared ambitions to be a top-three player in new mortgage stock, and Abbey, the Spanish-owned bank that last year embarked on an aggressive campaign in the UK.

This dramatic fall in its hold on new business hit HBOS shares by 4 per cent. At £10.30, they fell to within pennies of their low for this year.

BACKGROUND

• HBOS drops £1.5bn on mortgage mistake

• Halifax shock as UK new mortgage business plunges

• HBOS hikes SVR, hits borrowers

• Shares in HBOS drop nearly 5% on cautious outlook

• HBOS cautious as bad debts hit £1.7bn

HBOS must be more measured

The bank insists that it moved promptly to reverse its lending practices when it saw that new lending was falling

Related Internet Links

• HBOS company information

• HBOS share price chart

• HBOS forecast

HBOS claims that despite this, it will maintain a 20 per cent share of the whole mortgage market. This compares with Abbey's share of just under 10 per cent. The Santander subsidiary also suffered during the first quarter, seeing its share of net lending fall to 5.4 per cent.

HBOS, led by chief executive Andy Hornby, has 2.5 million mortgage customers, lent a net £18 billion last year and currently has mortgage "assets" of about £220 billion.

Mr Hodkinson told investors today that HBOS had effectively reversed the efforts made last year to retain mortgage customers, which included aggressive pricing and fee incentives for mortgage transfers.

He insisted that HBOS was now regaining poise, adding: "We are confident that we are now back on track to return to a 15-20 per cent share in the second half."

Although he said impairments on bad loans were "close to their peak", Mr Hodkinson nevertheless said the mortgage woes meant first half revenues in the retail division "will probably be flat half on half".

Analysts seized on the gloom, despite pledges by HBOS that the other divsions would balance the shortfall.

Mark Thomas and James Hutson, at Keefe, Bruyette & Woods, said: "This may be good for Northern Rock. The company [HBOS] expects to be back in the 15 to 20 per cent [lending share range] for the full year but this will still be lower growth than expected for the full year."

Sandy Chen, at Panmure Gordon, added that concerns about overdraft charge refunds at HBOS contributed to wider worries about volume growth in the retail division. He slashed his price target on the shares to £13.48 from £14.00.

A spokesman for HBOS said that the bank had been hit by a combination of two factors. First, high numbers of discounted fixed rate mortgage loans expired during the first quarter, he said. These loans were lent three or four years ago at the height of HBOS's aggressive dominance of the booming property lending market.

At the time, and under the previous chief executive James Crosby, HBOS held a mortgage market share of 25 to 26 per cent.

Second, HBOS was feeling the effects of its decision to exercise caution over lending and chase higher-margin loans at the expense of volumes, he added.

"The market has been very active in terms of 'churn'," the spokesman said. "We have been cautious. We will remain cautious. We will not sacrifice margins for volume."

In an otherwise relatively upbeat trading update ahead of its first-half results, HBOS said that every division apart from retail banking was posting double digit profit growth. It said that margins were growing in line with its previous guidance and it was on course to hit underlying earnings per share of 110.8p, some 10 per cent higher than in 2006.

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