Hedge Funds are beginning to bet that shares in Britain’s biggest banks have hit rock bottom, in spite of mounting speculation about further multi-billion-pound rights issues and fresh concerns about the mortgage market.

Traders have begun to scale back their “short” positions on shares in Britain’s biggest banks, according to research conducted by a large investment bank. A short position is a bet that the share price will fall.

Only 5.4% of Barclays’ shares are now held by short-sellers, compared with 10.5% a month ago. The size of the short position on Royal Bank of Scotland, which announced a £12 billion rights issue two weeks ago, has dropped from 6.1% to less than 4% over the same period.

There are still huge bets on a share-price collapse at Alliance & Leicester, where 20% of the shares are sold short, and Bradford & Bingley, where 16% of the register is in the hands of short-sellers. However, both positions have been trimmed since last month, the analysis shows.

Bad news is still emerging from the banking sector as the credit crisis continues to bite.

Lloyds TSB is expected to reveal £1 billion of write-downs this week. The bank is expectedto resist calls to raise additional capital, however, insisting that it has no need to do so.

Analysts at Dresdner Klein-wort last week predicted that Barclays would have to raise up to £3 billion of new capital.

Any announcement on a capital raising would undermine the credibility of Barclays’ chairman, Marcus Agius, who indicated at the bank’s recent annual meeting that it did not need to rush into any fundraising.

Barclays is talking to China Development Bank and the Sin-gaporean investment fund Tem-asek about a private share placing that could raise up to £2 billion. A deal is not expected to be announced until later this year, and may be avoided altogether if market conditions improve.

HBOS unveiled plans last week for a £4 billion rights issue amid deteriorating expectations for the housing market. Research by Merrill Lynch has revealed a rise in mortgage arrears. Roughly 1.1% of mortgages held in HBOS’s securitisation vehicle Permanent are more than 90 days in arrears, compared with 0.3% three years ago.Three-month arrears at Northern Rock’s Granite securitisation vehicle have jumped from 0.4% in October 2007 to about 0.7% last month.

Arrears in Bradford & Bingley’s mortgage book are also soaring. The number of borrowers over three months behind with payments has more than tripled since last summer, with 1.6% of the book now in arrears. Legal & General is joining the Northern Rock legal campaign led by hedge funds SRM Global and Rab Capital. The former shareholders in Northern Rock will apply for a judicial review of its nationalisation this week.

CITY CARNAGE

UBS will slash thousands of jobs this week, with as many as 1,000 posts predicted to be cut in its London operations.

The Swiss giant plans to slim radically its investment bank. About 8,000 jobs are expected to disappear globally.

Citigroup is also expected to warn of more job cuts, alongside a strategy update from new chief executive Vikram Pandit. Equity research is expected to be hit hard amid plans to focus on hedge-fund clients.

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