HBOS asks shareholders for £4 billion

The UK's biggest mortgage lender, Halifax Bank of Scotland, today called on shareholders for £4 billion to strengthen its balance sheet.

HBOS said the rights issue - which follows Royal Bank of Scotland's £12 billion cash call last week - was needed to "consolidate its competitive position".

The bank also wrote off £2.8 billion on investments hit by the credit crunch.

More than two million of the bank's smaller shareholders face paying out to maintain their stake in the bank in the rights issue.

Under the terms of the deal, they will be offered two new shares at 275p for every five held.

Chief executive Andy Hornby said the move would help boost the bank's core tier one ratio - a key measure of how well-capitalised a bank is - to between 6 per cent and 7 per cent. Investors will also receive an interim dividend in shares as HBOS looks to conserve its cash.

Mr Hornby said: "We are planning for a more challenging environment ahead and the proceeds of the rights issue should ensure that we benefit from strong ratios even if the macroeconomic environment deteriorates further.

"In the long term we remain optimistic about the fundamental prospects for our core businesses."

HBOS also described trading as "challenging" during the first three months of the year as the credit crisis impacted on the wider economy.

The firm, which supplies one in five new mortgages, is taking a cautious approach to unsecured lending and expects a "modest" increase in bad debt charges at its retail business.

And the bank's forecast of UK growth of between 1.25 per cent and 1.5 per cent in 2008 is well below official Treasury estimates and the predictions of most economists, despite a "fairly resilient" UK economy.

Mr Hornby, who expects a stronger second-half performance from the bank, said single-digit falls in house prices were likely both this year and next.

He added: "The capital raising announced today will provide us with financial resilience in challenging economic circumstances."

Mr Hornby, who added that the rights issue had been a "unanimous" board decision, is likely to face tough questions at the firm's Glasgow annual meeting today.

He said: "As chief executive you have to do the right thing for the business."

HBOS and other lenders have hiked mortgage rates for borrowers as the credit crunch puts up their funding costs - shutting out most first-time buyers without hefty deposits and squeezing homeowners attempting to remortgage.

Last Friday the bank increased its rates by up to 0.6 per cent for people who take out mortgages through an intermediary.

"The current conditions will probably last throughout the year," Mr Hornby added.

The bank posted underlying pre-tax profits of £5.71 billion for 2007 but its shares have suffered during a turbulent beginning to 2008.

In March false rumours swept the City that it was facing a funding crisis, prompting financial watchdogs and the Bank of England to make an unprecedented intervention to scotch the talk.