Smash hit

HBOS is the biggest private savings institution in Britain with £258 billion worth of deposits and 15 million savers.

While almost all banks have been targeted by worried shareholders since Lehman Brothers, the US investment bank, filed for bankruptcy on Monday, HBOS has been hit much harder than any others in Britain.

Standard & Poor’s, the agency that assesses the financial strength of thousands of companies, added to the bank's woes yesterday by saying HBOS was “less well positioned to manage the deteriorating operating environment” than its peers.

Deposits at HBOS are regarded by financial experts as safe because the Government has hinted, though never explicitly stated, that it would guarantee depositors of any British institution in trouble, as it did with Northern Rock last September.

However, bankers and regulators are acutely aware of how quickly panic can spread. In March, HBOS was plagued by a false rumour that it had gone to the Bank of England for emergency funding, sparking a brief downward move in its share price.

“The danger is that it can become a self-fulfilling prophecy,” Alex Potter, a banking analyst with Collins Stewart, said. He added that while HBOS was facing difficulties, the sell-off was seriously overdone and he advised investors to buy the shares at these levels.

An HBOS spokesman said the bank was winning new deposits and there was no evidence of customers withdrawing their money any more than usual. HBOS raised £4 billion from shareholders in July to beef up its balance sheet, but it has continued to be plagued by worries that it is less solid than some of its peers.

In particular, traders worry that when Lehman’s more toxic assets are sold by the administrators, that will cut the value of other banks’ holdings. By law they have to value their assets at the prevailing market price. HBOS owns asset-backed securities last valued at £37 billion, of which £6.6 billion depend ultimately on the creditworthiness of poor Americans and those with impaired credit histories.

Another concern has been HBOS’s dependence on the wholesale markets to fund its mortgage lending. The wholesale market is where banks lend money to each.

Since last year, when the credit crunch spread, banks have chosen to hang onto cash instead of lending to others. This means that there is less liquidity which drives up the cost of borrowing in the wholesale market.

HBOS still needs to raise as much as £128 billion gross in the next quarter. However, it has about £60 billion in liquid assets and can expect to collect £30 billion in normal loan repayments, leaving it with a much more manageable £40 billion still to find, Mr Potter said.

Other traders have more doubts. One said: “HBOS has an enormous amount of exposure to the UK mortgage market, where prices are under pressure. The rest of its loans are to small and medium-sized enterprises, which are struggling, and it’s been feeding heavily at the trough of private equity, which is also not what it used to be.

“The amount of loans it has outstanding is almost twice what it has in deposits. It has wholesale funding that it has to roll over at what are likely to be much higher prices, and it needs that funding just to stand still. So it’s either got to shrink rapidly or its margins are going to be hit.”

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