Decision day for HBOS board on £4bn rights issue

The board of HBOS, Britain's fifth biggest bank, is to hold last-minute talks on whether to stage a rights issue, in a fund-raising effort that could seek as much as £4bn from shareholders.

HBOS's directors, led by the chairman, Lord Stevenson, and the chief executive, Andy Hornby, will make a final decision on a rights issue today, ahead of the trading update that the bank will publish tomorrow morning prior to its annual general meeting, which begins at lunch-time in Glasgow.

On the face of it, HBOS has no pressing need for a rights issue, enjoying a greater degree of capital strength than many of its rivals. It core tier-one equity ratio is 5.7 per cent, significantly above the equivalent figure of 5.1 per cent at Barclays, which last week ruled out holding a rights issue in the near future.

The figure at Royal Bank of Scotland is about 4 per cent, though the bank hopes to push its ratio closer to 6 per cent following a £12bn rights issue announced earlier this month, as well as asset sales.

However, several board members are understood to believe that now would be a prudent moment to ask shareholders for additional capital, particularly with RBS having paved the way for banking fund-raisings.

HBOS's views on the economic outlook in the UK this year have been markedly more pessimistic than some of its rivals, enabling Mr Hornby to argue that raising capital now would be a sensible buffer against more difficult times ahead.

The bank is also expected to announce further writedowns of its assets in tomorrow's trading update, with reductions of up to £3bn in credit crisis-affected investments forecast by some analysts.

In addition, HBOS faces a particular challenge to its capital strength because of its strong position in the mortgage industry, where it has a 20 per cent market share.

The bank's house view is that the housing market will show single-digit price falls during 2008, which will increase the risk-profile of the home loans it holds. Jonathan Pierce, a banking analyst at Credit Suisse, has said that a 10 per cent fall in house prices this year could damage HBOS's tier-one ratio by as much as 40 basis points, because under Basel II banking regulations it would have to account for a 60 per cent rise in mortgage risk weighted assets. Credit Suisse said HBOS could need to raise £4.5bn in a right issue.

Raising additional capital would enable HBOS at least to maintain its current level of competitiveness in the mortgage market amid the increasing nervousness with which leading lenders have been eyeing Abbey in recent weeks. The mortgage bank, owned by Spain's Santander, which has escaped the credit crunch relatively unscathed, is estimated to have taken up to 20 per cent of all new mortgage business this year with aggressive pricing that rivals, more constrained by the crisis, have not been able or willing to match.

HBOS is in a particularly invidious position on mortgages because as the market leader it is most exposed to political pressure to reduce interest rates following the Bank of England's £50bn special liquidity scheme. Raising additional capital might make it easier for HBOS to ease lending restrictions, in line with the quid pro quo expected by the Bank.

On the downside, HBOS executives will have noted the anger in some quarters of RBS's shareholder base following its announcement of a rights issue, which has lead to calls for Sir Fred Goodwin, the bank's chief executive to stand down.

HBOS investors have seen the value of the bank more than halve in the past 10 months, with the share price falling from a high of 1,102p at the beginning of June to just 497p at the close on Friday.

A spokesman for HBOS declined to comment last night.