Speculation is mounting that the government might be forced to nationalise the newly formed Lloyds Banking Group, amid its plummeting share price and a £10 billion loss by HBOS.
Over the weekend, chancellor Alistair Darling refuted rumours that the bank, in which the government already has a 43% stake, could be fully nationalised. He maintained that banks are best run in the private sector.
The rumours were prompted by the announcement on Friday [13 February], that HBOS is likely to make a loss of £10 billion for the whole of 2008. Lloyds Banking Group, which was created after the Lloyds TSB and HBOS merger, originally thought losses would be nearer £8 billion. However, it updated its forecast in light of “increasingly difficult market conditions”.
In a statement to investors, Eric Daniels, group chief executive of Lloyds Banking Group, said: “HBOS’s 2008 results have been adversely affected by the impact of market dislocation, which accelerated significantly in the last quarter of 2008, and the additional impairments required on the HBOS corporate lending portfolios.”
While Lloyds TSB traded profitably and is expected to report a profit before tax of around £1.3 billion, the HBOS group of businesses has performed less well.
Investors remain seriously concerned over a £7 billion write-down at HBOS' corporate division, following heavy falls in the commercial property and housing sectors, as well as the £10 billion pre-tax losses for 2008. There are also fears that more bad news could come out of the woodwork in the near future – potentially knocking the banks’ capital position.
Analysts at UBS said: "Losses from the HBOS book are not surprising and we expect them to push the combined group into a loss for 2009. If losses were to accelerate, there is a risk capital could reduce to levels below which the market would have confidence in the group."
On Sunday Lord Adair Turner, chairman of the Financial Services Authority (FSA), said the warning of massive losses at HBOS did not come as a surprise to the regulator. He told the BBC that HBOS’ losses were in line with a worst case “stress-test” carried out when Lloyds and RBS turned to the government for financial support.
Pressure is now growing for an inquiry into Lloyds’ government orchestrated takeover of HBOS – initially designed to avoid the banks from turning to the public purse for financial support. The speed at which the merger went through raised eyebrows at the time with Lloyds chief executive Eric Daniels telling MPs he would have liked to have had five times longer to look at the HBOS books.
HBOS losses could now push the combined bank into the red for the year despite expectations of a £1.3 billion profit on the Lloyds side of the business.
The backlash against bonuses at banks continued this weekend amid reports that Lloyds plans to pay up to £120 million to thousands of staff. However, it insisted that only clerks earning around £20,000 a year would be in line for a ‘reward’ typically of around £1,000 or less.
Chief executive Eric Daniels and other members of the board have been banned from receiving any bonuses after the bank was bailed out with £17 billion of taxpayers’ cash.
Over the weekend the government took a tougher stance on bonus payouts for more senior executives. The financial secretary to the Treasury, Stephen Timms, said: "I think people will rightly want to make sure that very well-paid people who have contributed to the problems we are now seeing across the banking sector should not be rewarded by bonuses."
The Conservatives have called for all bonuses at banks which have been bailed-out by the taxpayer to be capped at £2,000.