HBOS considers £4bn cash call - and other banks may follow

HBOS considers £4bn cash call - and other banks may follow

HBOS is considering a cash call on its investors to shore up its balance sheet, in the face of a weakening housing market and £3bn of credit crunch write-downs.

The owner of the country's biggest mortgage lender, Halifax, is expected to update the City on its capital position and trading at its annual meeting tomorrow in Glasgow.

Although its regulatory capital position is stronger than that of RBS, which last week unveiled plans for a record-breaking £12bn rights issue, HBOS is considered a candidate for a fund-raising exercise. HBOS might need to raise as much as £4bn. Barclays, also facing speculation about a possible rights issue, last week played down any intention to boost its regulatory capital this way.

The board of HBOS is scheduled to convene before the shareholder meeting and take the final decision on whether a rights issue is needed immediately.

If the board does decide to move quickly, it is likely to insist that it tried to forewarn investors. HBOS's chief executive, Andy Hornby, has been more pessimistic than his rivals for some time. But he is likely to come under pressure about the sharp increase in write-downs caused by exposure to instruments affected by the credit crisis - which are estimated to amount to £3bn.

Hornby has said for some time that conditions in the financial sector are challenging. As owner of the marketleading mortgage lender, HBOS is also particularly vulnerable to any sharp.....continued below

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downturn in house prices. Halifax, which usually sells about one in every five home loans in Britain, is already predicting that its house price index will show a single-digit decline in average prices this year, for the first time in more than 10 years.

This alone may be enough to persuade HBOS to raise capital to prepare for a downturn. But, fresh writedowns - on top of £227m announced so far - may force the issue. The City's main concern is about its exposure to £7bn of Alt-A mortgages - just above sub-prime in terms of risk - in the US, and whether it needs to take write-downs against these holdings. Analysts have pointed out RBS is valuing its Alt-A mortgages at half their original value. HBOS also admitted this month that the "significant deterioration in financial markets" could make it necessary to announce more write-downs, which are thought likely to total about £3bn.

While HBOS refused to comment, concern at its exposure to Alt-A mortgages surfaced last month amid speculation which caused a 17% fall in the bank's share price in a couple of minutes and an unprecedented warning from the Financial Services Authority that it was looking at the trade in the bank's shares to establish the cause of false rumours.

The City regulator also made clear that it was looking at trading patterns in a number of shares which moved erratically, in an attempt to root out short sellers - traders who sell shares in the hope of buying them back more cheaply later.While the HBOS board ruminates, executives from RBS are trying to persuade major investors to back its rights issue, which at 200p is at almost a 50% discount to the share price and is underwritten by three investment banks, demonstrating the difficult environment in which the cash call is being made.