HBOS merger with Lloyds approved as its bad debts soar

Shares fall 23% as bank sounds alarm over its loans

Halifax Bank of Scotland's bad debts and other charges have risen by two-thirds in two months as corporate and consumer loans buckle under economic pressure.

The banking giant, whose shareholders yesterday approved its takeover by Lloyds TSB, said its charges for bad debts and asset devaluations were £8bn for the year to 30 November, up from £4.8bn at the end of September. It also warned that more pain lay ahead, sending its shares down 23 per cent and hurting those of other British lenders. Shares in Lloyds fell by 18 per cent, RBS was down 15 per cent and Barclays lost 8 per cent.

HBOS, the UK's biggest mortgage lender, said the new losses would further reduce its capital ratios, although it had not yet quantified the deterioration. It added that the decline in credit quality across its client base had accelerated, and estimated that its assets had fallen sharply in value since November.

"Global market and economic conditions, the UK recession and increasing unemployment will continue to present a particularly challenging operating and credit environment," it said.

Bankers across the City say the worst could be yet to come as the financial crisis spreads throughout the economy. It is then expected to come back to haunt the banks through the money troubles of their customers. This means there is little scope for banks' business conditions to improve, and some expect a renewed round of emergency capital raising next year. "The [HBOS] news is bearish across the sector," said Alex Potter, an analyst at Collins Stewart.

HBOS said bad debts on its corporate loans almost doubled from £1.7bn to £3.3bn. Losses on the unit's investment portfolio also rose to £800m from £100m two months earlier.

Sharp declines in house prices and pressure on margins from interest rate cuts helped lift its impairments on mortgages from £400m to £700m, the bank said. The unsecured impairment charge rose from £800m to £1bn.