Profit margins come under pressure at HBOS

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The Independent Online

HBOS's chief executive Andy Hornby tried to shore up con-fidence in his bank's prospects yesterday after a downbeat results statement sent its shares plunging.

HBOS's underlying pre-tax profit for 2007 rose 3 per cent to £5.71bn, in line with analysts' expectations. But the bank's shares fell 6.8 per cent to 657p after profit margins were squeezed and it warned of tough financial markets for all of this year. At one point, the shares were down almost 11 per cent – the biggest drop since Halifax and Bank of Scotland merged to form HBOS in 2001.

Mr Hornby said HBOS had not wanted to over-promise on the prospects for the year and that the worst was over for the margin. He added: "We have absolutely been extremely prudent in our long-term outlook... We have also said we are in a really resilient space in terms of our earnings. We feel in good shape to withstand what are going to remain uncertain times for financial markets."

HBOS wrote down £227m for the reduced value of debt securities hit by market turmoil, up from an estimate of £180m given in December.

The potential loss was small compared with the £1.6bn announced last week by Barclays. But some analysts were perturbed by the announcement on its balance sheet of £7.1bn "Alt-A" assets, which are higher grade than sub-prime but still considered risky.

Mike Trippitt, analyst at Oriel Securities, said: "Well done to them for trying to be realistic about 2008, but it has backfired a bit. You have got something in the price reduction for a 2008 earnings downgrade and a fear factor about treasury impairments."

HBOS has been hit by the increased cost of funding in wholesale markets after the credit crunch brought to an end the period of cheap money banks had used to fuel lending.

The bank's key net interest margin narrowed by 9 basis points to 1.63 per cent. The squeeze was mainly in retail banking, where returns on mortgages were hit by competition in the first half and higher funding costs in the second half.

Mr Hornby predicted a "low single-digit" decline in the margin this year – better than over the past five years – as pricing improved in mortgages and corporate lending.

The bank increased its full-year dividend by 18 per cent to 48.9p with a surprise 16 per cent hike in the final payout. Mr Hornby said the increase was good news for the bank's 2.1 million small shareholders and a sign of the bank's solidity.

Britain's biggest mortgage lender said the mortgage market would grow by £80-90bn this year.