HBOS board prepares for £4bn cash call

HBOS is set to announce a rights issue of up to £4bn today to shore up its balance sheet as asset writedowns increase and clouds gather over the UK economy.

The board of Britain's biggest mortgage lender met yesterday to approve the cash call on shareholders. Lord Stevenson, the chairman, and Andy Hornby, chief executive, will defend the board's decision at HBOS's annual meeting in Glasgow today.

The bank is expected to announce about £3bn of writedowns on its credit-related holdings. HBOS surprised investors at its full-year results in February when it revealed £9.5bn of US residential mortgage-backed securities on its books, including £7.1bn based on Alt-A mortgages, which are slightly safer than sub-prime home loans.

The bank took a £227m write-down on its holdings for 2007, but Royal Bank of Scotland's massive £6bn charge, unveiled last week along with its £12bn rights issue, has raised fears of bigger losses. Analysts have said that it is wrong to assume a direct "read across" from RBS because the assets differ.

Jane Coffey, head of equities at Royal London Asset Management, said: "I will be interested in terms of what is happening to their Alt-A exposure, which they wrote down, but were very vociferous about the fact that they didn't expect to see any defaults on that money in the long term." She said bank valuations did not yet reflect the potential impact of an economic slowdown on their businesses.

HBOS's equity tier-one ratio – which measures the highest-quality buffer against losses – was 5.7 per cent at the end of 2007, compared with about 4 per cent for RBS and 5.1 per cent for Barclays. At the bank's results, Mr Hornby, HBOS's chief executive, was more cautious than some rivals on prospects for markets and the economy. A worsening of that gloomy outlook has played a big part in the move towards the rights issue.

HBOS shares fell just 0.25 per cent to 495.75p yesterday, indicating the market had priced in the rights issue. The shares have fallen by almost a third this year.

Another investor said: "We are sort of getting used to all this now. The market's reaction really depends on what goes along with it ... We will definitely want to know what the dividend will be and we don't know that yet."

Banks have been under pressure from politicians and regulators to strengthen their capital positions. Barclays has not ruled out raising capital, but the bank surprised some observers last week when it insisted it had no need to do so at present.

HBOS's move could put extra pressure on Bradford & Bingley, which has already considered a rights issue, and Alliance & Leicester, which has its AGM on 13 May.