Gloom deepens in the banking sector as HBOS profits plunge 60 per cent

With bid speculation intensifying after its failed rights issue, the high street mortgage lender is among a raft of banks reporting this week

HBOS, the mortgage lender at the centre of bid speculation following its spectacular rights issue flop, is expected to add to the gloom surrounding its brand this week by disclosing that its first-half profits are 60 per cent lower than last year.

Andy Hornby, chief executive of HBOS, will report its interim results on Thursday. Other banks also reporting include Lloyds TSB, Alliance & Leicester (A&L) and Allied Irish, in a bellwether week for the troubled UK banking sector.

In the past week, HBOS has been at the centre of market speculation that Spain's second-largest bank, BBVA, is considering making a bid. The British bank's £4bn cash call flopped nine days ago after just 8.3 per cent of shareholders took up their rights. This left underwriters Morgan Stanley and Dresdner Kleinwort with a £3.8bn "rump" of shares, representing just under 6 per cent of the company.

The bid speculation intensified on Friday after it emerged that JPMorgan, the US investment bank, had held talks with several interested parties about breaking up HBOS.

JPMorgan was reported to have spoken to National Australia Bank (NAB) about buying HBOS's Australian division, BankWest, and its corporate banking arm. The investment bank is also claimed to have spoken to the Spanish banking giant Santander – which a fortnight ago agreed to take over A&L – and private equity firms.

However, that rumour was widely dismissed by sources close to the institutions said to be involved in the talks. The speculation was further dampened on Friday, after NAB wrote down an additional A$830m (£400m) from its investments in US housing mortgages, and analysts raised concerns about another A$4.5bn the bank holds in loan assets.

"We're not sure this is a clever time to make acquisitions," NAB's chief executive, John Stewart, said, shortly after announcing the writedowns.

Investors initially seemed opposed to the prospect of a break-up of HBOS, with shares down 3 per cent in early trading before closing up 2.9 per cent at 310p, above the rights price of 275p.

Banking analysts Mark Phin and James Hutson at Keefe, Bruyette & Woods (KBW), expect it to reveal pre-tax profits of £1.16bn – a 61 per cent drop on the same time last year – after it absorbs £1.02bn of Treasury losses.

Alex Potter, banking analyst at Collins Stewart, said he believed HBOS was now discounting too much bad news: "Earnings will be far less closely watched than movements on writedowns, as well as management's willingness to engage in self-help," Overall, he expected the so-called banking results season to be characterised by a "myopic obsession with the balance sheet and capital ratios".

Lloyds TSB, which will report on Wednesday, is expected to outperform its peers thanks to its relatively low-risk strategy. Allied Irish, expected to have single-digit earnings growth, will also report on Wednesday. A&L, which KBW expects to have a modest pre-tax profit of £5m, will report on Friday.