Debts rise as borrowers struggle
Jun 20 2008 by Iain Laing, The Journal
HALIFAX Bank of Scotland has revealed £1bn in write-downs and warned that house prices could now fall 9% this year.
The grim property price prediction – a near doubling of the bank’s previous expectations – will cause its bad debts to rise as more borrowers struggle with repayments, said HBOS.
Britain’s largest mortgage bank sparked share losses across the banking sector, itself down 6%, while fellow lending giant Alliance & Leicester dropped 6%, followed by Barclays and Lloyds TSB, both shedding more than 2%.
HBOS said trading was satisfactory and that it expected to put in a “resilient” performance in 2008 as it sought to reassure investors ahead of its £4bn rights issue.
The bank was forced to issue a statement last week insisting its cash call remained on track, despite its share price dipping below the discounted offer price. But the update raised concerns with news of rising arrears amid the housing market woes and a further £58m in credit crunch write-downs since the end of March, taking the total so far this year to £1.03bn.
The group’s forecast for house prices marks a steep decline from the bank’s previous estimate – made as recently as last month – for “mid-single digit” declines in 2008.
HBOS said its revised prediction reflected the UK’s slowing economy, a rise in unemployment and limited scope for interest rate cuts amid soaring inflation. House sales are also set to plummet by 45% this year, cautioned the group.
It said arrears levels were increasing as expected, but admitted bad debt charges would rise as the property slump worsens.
Arrears levels for borrowers falling three months or more behind with repayments rose to 1.89% of total mortgages from 1.67% at the end of December. Specialist mortgages, such as buy-to-let and self-certification loans, where borrowers self-declare their earnings, saw arrears levels increase from 2.59% to 3.09% in the past five months, said HBOS.
Retail profits this year will be cut by bad debts and increased costs of raising funds in the crisis-hit wholesale money markets, according to the group. However, it is expecting a better second half performance, with the higher interest rates being charged on loans and mortgages helping boost income and margins.
Citigroup analysts highlighted the arrears levels as a key concern and said the 9% revised property price prediction may still be too optimistic. HBOS is hoping to mobilise its two million strong army of private investors to stump up cash for the £4bn fundraising.
Appetite for the scheme was thrown into doubt amid last week’s share price fall below the 275p offer price, although the stock has since recovered above the threshold.
There have also been concerns over its exposure to the embattled housebuilding sector through a raft of investments in firms such as McCarthy & Stone. The group confirmed that it had £4.2bn in investments and loans to the housebuilding market, but sought to reassure that its exposure was largely in niche areas.
