Mortgage lender HBOS Plc (HBOS.L) said Monday that its profitability for nine months ended in September has been impacted by higher impairments, negative fair value adjustments to the Treasury Portfolio, the sale of BankWest and short term fluctuations in investment returns. Going forward, the company said it expects the credit environment to remain challenging.
According to the company, it is operating in difficult market conditions. Total impairment charge for the nine-month period was GBP 1.72 billion, up from GBP 469 million in the period ended on June 30, 2008. Charge for the third quarter reflects a significant increase in the collective provision in light of the worsening economic outlook.
Despite higher funding costs, net interest income from the company's banking businesses increased, with good contribution from its Insurance & Investment business.
HBOS also said its Retail business is proving resilient in difficult market conditions, driven by the strength of retail net interest income, which supported profitability. For the year as a whole, the retail net interest margin is expected to be broadly stable relative to the first half of 2008.
During the nine-month period, secured lending arrears were up broadly in line with expectations, the company noted. Hurt by lower house prices, secured impairment charge increased to GBP 440 million from GBP 213 million as of June 30, 2008. Unsecured lending arrears also gave rise to an impairment charge of GBP 806 million for the period.
At the end of September, mainstream mortgages accounted for 71.9% of balances, 13.3% of Buy-to-Let, 12.6% of Self Certified and 2.2% of other Lending.
Total secured impaired loans increased to GBP 5.62 billion from GBP 5.14 billion in the June period. Meanwhile, the company's corporate investment portfolio showed a loss of GBP 93 million, compared with a profit of GBP 134 million in the June period. Losses from associates and jointly controlled entities widened to GBP 105 million from GBP 34 million as of June 30, 2008. Impairment of investment securities rose to GBP 284 million from GBP 145 million in the prior period. As of September 30, 2008, the book value of the investment portfolio was GBP 4.8 billion, lower than GBP 4.9 billion as on June 30. 2008.
Further, HBOS said its Insurance & Investment division continues to make a good contribution to group profitability, with higher new insurance sales in household and motor, offset by lower repayment business. In the International segment, the sale of BankWest and St. Andrew's Insurance in Australia is scheduled to be complete before the end of 2008. The transaction will result in a pre-tax loss of some GBP 690 million, including goodwill written-off. However, the sale is positive in terms of the effect on capital ratios, the company noted.
In the treasury portfolio, losses due to market dislocation totaled GBP 1.83 billion, including GBP 457 million of impairment losses on the Banking Book relating to Lehmans and Washington Mutual. Further impairment losses of around GBP 150 million are expected to be taken in relation to Icelandic banks.
HBOS also said that its proposed acquisition by British bank Lloyds TSB Group Plc (LYG, LLOY.L) is proceeding as per plan. In mid-September, Lloyds TSB had announced a deal to buy HBOS for 12.2 billion pounds, or U$22 billion, to create a financial giant that will hold nearly 28% of Britain's mortgage market.
Lloyds TSB will be meeting on November 19 to approve the HBOS acquisition. HBOS expects to hold a General Meeting in December 2008 to approve the acquisition and the placing of equity and preference shares. HBOS expects to close the transaction in January 2009.
HBOS.L is trading at 103.10 pence on the LSE, up 3.80 pence, on a volume of 4.8 million shares.
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