Concerns mount over Lloyds TSB deal

Analysts are sounding the alarm at the amount of risky debt Lloyds will take on
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The Independent Online

Further doubts were raised about Lloyds TSB's emergency takeover of HBOS yesterday, as influential analysts warned that the deal could leave Lloyds short of capital and exposed to a surge in bad debts.

Credit Suisse analysts said the bank's combined exposure following the takeover to more than £200bn of UK specialist mortgages, unsecured lending and commercial property could increase its risk-weighted assetsby more than a quarter, hitting itscapital ratios.

Deutsche Bank analysts predicted that the deal would reduce Lloyds' equity tier-one ratio to 5.6 per cent and that the bank would have to raise at least £4.5bn of capital to take its core ratio to 6.5 per cent, thus allowing it to trade confidently through a rocky 2009. Both sets of analysts said Lloyds could easily beat its initial prediction of at least £1bn cost savings a year. But they argued that near-term worries about credit risk, funding and capital would overshadow those potential gains. "The question is whether the disproportionate transfer of HBOS equity to its shareholders, combined with the synergies, offsets the risks [Lloyds TSB] is taking on. In the medium term, this might be the case, but on a 6-12 month view, we would not invest in Lloyds TSB," the Credit Suisse analysts wrote.

Credit Suisse also warned there was a danger of HBOS trying to renegotiate the deal, which sees its shareholders taking 42 per cent of the company while contributing 70 per cent of the tangible equity. Some HBOS shareholders, including Schroders and Standard Life, have complained that HBOS sold out too cheaply.

Credit Suisse warned HBOS against trying to get better terms, pointing out that while liquidity for very short-term borrowing had improved, longer-term borrowing prospects were still precarious.

Lloyds has hailed the deal as a unique opportunity to gain massive scale in the UK and launch itself into the big league of international banks over time. The takeover, agreed in rushed talks on Wednesday last week, as HBOS's shares sank, will turn Lloyds into Britain's dominant retail bank. But the market has reacted with increasing unease to the creation of a superbank so geared to the fragile UK economy.

Lloyds shares traded down most of yesterday but closed up 2.3 per cent at 273.25p on hopes that the US bailout fund would go ahead soon. HBOS shares rose 1.9 per cent to 184p. HBOS shares are trading at a 19 per cent discount to Lloyds' offer, which is valued at 227.6p per HBOS share. Industry observers have said this discount reflects jittery markets and concerns about banking stocks in general.

Rivals believe the takeover will go through because the Government has put its full weight behind it. The Office of Fair Trading is to report on the competition implications by 24 October.