HBOS: Their Heads in the Sand

It is October 2008, month of destiny, and the financial industry throughout the Western world is on its knees, struggling to survive, with bankruptcies and Government rescues to left and right and a blizzard of terrible news.

Enter the biggest British mortgage provider, by the name Halifax Bank of Scotland, or HBOS for short. Caught mired in bad management, greed and carelessness, this bank is on the verge of total collapse and overnight (it seems) does a deal with Lloyds TSB, a more solid bank, that is, if there is a solid bank this side of the Urals. It has no choice, it seems. The other option is collapse.

Believe it or not these are extracts from the paper sent round to shareholders (I am one) by Lloyds TSB entitled “Recommended acquisition of HBOS plc by Lloyds TSB Group plc”. As a wonderful example of out-of-touch thinking this takes the biscuit, or a whole plate of them:

The Boards of HBOS and Lloyds TSB believe that the Acquisition is a compelling business combination which offers substantial benefits for shareholders and customers.

This is code for saying that if you don´t agree, my fellow shareholders, you´ll lose the lot.

Lloyds TSB´s stated strategic aim is to build the U.K´s leading financial services company by focusing on growing sustainable earnings streams, based on deep customer relationships.

Isn´t it wonderful - “deep customer relationships”! They cut the staff in all their branches, you can´t find anyone who knows anything, then they charge you for service. Now they talk about “sustainable earnings streams” from a company that hasn´t a bean to bless itself with. The naughty little secret is that it is HSBC that is likely to come out of all this as the strongest bank in the U.K, and Lloyds TSB has just shot itself in both feet. Alice, wandering around Wonderland would find this as curious as the smile on the face of the Cheshire Cat.

Specifically Lloyds TSB intends that new lending by the new combined bank for both UK mortgages and SMEs will continue at least at current levels and will expand as market conditions improve.

HBOS is up to its neck in unsustainable mortgages and commercial property deals it didn't understand. There´s no way they can continue as normal.

In addition, Lloyds TSB intends to increase the range of products on offer on competitive terms to First Time Buyers, building on the current shared equity and shared ownership offers.

Just a moment. Let´s get this straight. Does this mean they are going to offer first time buyers earning peanuts mortgages based on zero down payment? House prices are still so high that most first time buyers cannot raise the 25 or 30% traditional down payment, so what will they do? Offer them £5000 pounds cashback with every mortgage?

The Enlarged Group intends to operate a dividend policy which is consistent with attaining its desired capital ratios and financing the growth of the business.

In other words there will probably be no dividends at all for years.

Lloyds TSB estimates that a combination with HBOS will lead to an additional contribution to earnings before tax from the cost of the synergies significantly in excess of £1 billion per year by 2011.

What kind of pie in the sky is this bit of wishful thinking? Plum or apple?

It is expected that the Acquisition will lead to the accretion in Lloyds TSB earnings per share of over 20% p.a, including cost synergies ... from 2011. This statement as to financial accretion is not intended to mean that Lloyds TSB´s future earnings per share will necessarily exceed or match those in any prior year.

You betcha! If HBOS doesn´t drag them down into bankruptcy.

The combined group will benefit from a portfolio of strong and trusted brands including Bank of Scotland, Halifax, C & G and Scottish Widows.

Bank of Scotland? Halifax? They´re bust, fellows, bust! Who would trust those names after their incompetent boss sold his shareholders, myself included, down the drain?

And what does the author of the HBOS debacle have to say? Does he apologise for losing shareholders a huge hunk of their investment or beg forgiveness from his staff for the almost guaranteed redundancies? No. This is how he blithely comments:

This is the right transaction for HBOS and its shareholders. Against a backdrop of the very high volatility our industry is experiencing, the combined group will be one of the strongest players in the UK financial services sector. In addition the combined group will have excellent brands and a very powerful franchise.

No sooner had Dennis Stevenson, Chairman of HBOS, made the above remarks than the merger with Lloyds TSB had to be promptly re-negotiated (Lloyds looked at the HBOS books), This meant that HBOS shareholders would receive a smaller percentage of Lloyds shares than they had expected (thanks, guys). At the same time it was announced that the government would take a stake of about 40% in the newly merged bank, effective nationalization of the U.K´s “leading financial services company.” Mmmh.

So why did the government intervene? Because HBOS is bust, fellows, HBOS is bust!

To quote the first line of the musical, "Chicago": "They had it coming, they had it coming, they only had themselves to blame."