HBOS: Lloyds rides to the rescue

HBOS has confirmed today that it is in advanced talks over a possible takeover by Lloyds TSB. The financial giant created in 2001 by the merger of Halifax and Bank of Scotland is Britain’s largest mortgage lender with a fifth of the UK's mortgage market. It has seen its share price collapse on fears over its ability to fund itself in the wholesale credit markets.

HBOS shares were down 52 per cent this morning before news of top level discussions between Lloyds TSB's chairman Sir Victor Blank and the Prime Minister emerged.

Lloyds TSB is the only UK bank rated AAA by rating agency Moody's, as a result of its conservative business approach under the stewardship of chief executive Eric Daniels.

Ironically, Lloyds' own problems earlier in the decade with its Scottish Widows insurance business have helped put it in the position to take over HBOS. As a result of the Scottish Widows difficulties, the bank

concentrated on building its deposit-base and had a relatively small exposure to risky sub-prime mortgage loans. It has therefore avoided the emergency fund-raising needed by its rivals.

So Lloyds has the balance sheet to buy HBOS and with it treble its exposure to the housing market. The combined entity would be a banking giant worth £30bn, with 28 per cent of the UK mortgage market and home loans worth £335bn. In normal times such dominance would raise protests, but in this case the Government is supporting the takeover in the interests of financial stability.

The price of any deal remains uncertain. A BBC report this morning suggested that the purchase price would be £3 per share, leading to massive gyrations in the stock price, as it recovered from its steep fall to trade in positive territory.

Some commentators have raised questions today over the way the information emerged, with brokers who had shorted HBOS shares likely to be nursing significant losses as a result. Analysts were agreed that Lloyds would be likely to pay nearer £2 per share for any acquisition.