RNS Number : 0533X
HBOS PLC
19 June 2008
HBOS PLC
Trading Update June 2008
19 June 2008
This trading update covers the period from 1 January 2008 to 31 May 2008 and updates the Interim Management Statement published on 29 April 2008.
GROUP TRADING overview
Trading continues to be satisfactory and remains in line with the Group's expectations. While HBOS is not immune from the global dislocation in financial markets that is impacting the wider economy and credit conditions, it is on track to demonstrate a resilient performance in 2008. As previously indicated, performance will be more weighted to the second half year, primarily reflecting the negative fair value adjustments taken in respect of the Treasury Trading Book to 31 May 2008.
In Retail, despite the decline in house prices with its commensurate impact on impairments, the Retail business is delivering a robust performance. We expect good growth in net interest income on the back of moderate asset growth and stabilising margins.
In Corporate we are seeing improved pricing but adopting a cautious approach, and slowing asset growth.
In Insurance & Investment we are enjoying a good year. Insurance is benefiting from strong sales in home insurance and motor and, to date, the absence of extreme weather events as experienced in 2007. Despite unfavourable market conditions for equities, our investment business continues to see good profit growth for 2008.
Our International businesses continue to trade well and in line with our expectations, although we are deliberately growing assets at a slower pace than in recent years.
The Group is achieving substantially better pricing on new lending and we expect good growth in net interest income in 2008. As previously indicated, the decline in the net interest margin in the year is likely to be lower than in 2007. The combination of better pricing being achieved for new lending, together with the re-pricing of existing assets, underpins our expectations of stable or potentially improving margins in 2009.
Other income will be significantly lower than in 2007, mainly due to negative fair value adjustments to the Treasury Trading Book and lower revenues from the Corporate investment portfolio.
The rate of cost growth is expected to decline in 2008. HBOS is committed to exercising tight cost control and managing its cost base in the context of the changing business environment.
In the UK housing market, declining house prices continue to exert pressure on impairment charges. Arrears levels in our mortgage book, however, remain in line with our expectations at the beginning of the year. Unsecured credit performance is stable. Whilst evidence of corporate difficulty is limited to specific sectors, our plans anticipate a continued softening in the economic climate, resulting in higher impairment charges.
The quality of our Treasury portfolio remains strong, comprising predominantly AAA rated securities. Since the Interim Management Statement on 29 April 2008, covering the period to 31 March 2008, the negative fair value adjustments in respect of securities held in the Treasury Trading Book taken through the Income Statement have increased by £58m to £1,028m. The post-tax negative fair value adjustments in relation to the Treasury Banking Book taken through equity have reduced by £49m to £1,825m. Further details of the Treasury portfolio are given in Appendix 1.
Asset growth has been reasonably strong in the year to date as a consequence of the pipeline of business coming into the year. As planned, we have now slowed the rate of asset growth and this will continue in the second half year. Competition for deposits is strong but retail deposit inflows in May were at record levels and, for the full year, the rate of deposit growth is expected to exceed asset growth.
The Group continues to fund successfully in global money markets. In addition, since the beginning of the year HBOS has raised some £8.3bn in the (over 1 year) term capital markets, including over £6bn senior debt, £750m innovative Tier 1 securities and £1.1bn lower Tier 2 subordinated debt.
We expect to maintain strong capital ratios and, after the rights issue, the Tier 1 ratio is expected to be within the range of 8% to 9% and the Core Tier 1 ratio between 6% and 7%.
In a more difficult trading environment, HBOS expects a resilient performance in 2008, which will provide a sound platform for the future.
DIVISIONAL TRADING
Retail
The UK housing market remains subdued, with transactions likely to be 45% lower in 2008 than in the previous year. We continue to write approximately 1 in 5 new mortgages but, allowing for principal repaid, we expect only modest growth in balances.
Competition for retail deposits has been strong but recent inflows have been very encouraging. May 2008 was a record month for HBOS retail inflows and over the full year we expect good growth.
The Retail margin has been similar to the second half of 2007 and is expected to remain stable throughout 2008, as the benefits of asset re-pricing mitigate higher funding costs, with the potential for improving margins in 2009. Approximately one-third of the mortgage portfolio is expected to re-price in 2008 due to new lending and the transfer of existing customers from maturing fixed and introductory rates to new products or to the standard variable rate.
The decline in house prices is now forecast to be up to 9% in 2008, which will have an adverse impact on secured impairment charges. The overall increase in arrears levels across the book, and in individual segments, is in line with our expectations at the beginning of the year. Unsecured lending credit metrics are stable and some reduction in impairment losses from the peak in 2007 is expected.
Residential Mortgages and Arrears Trends:
At the end of May 2008, mainstream mortgages accounted for 72.1% of balances (73.2% Dec 2007), Buy-to-Let (BTL) 12.7% (11.3% Dec 2007), Self Certified 13.0% (13.3% Dec 2007) and Other Lending 2.2% (2.2% Dec 2007).
Mortgage book LTV ratios are based on mortgage balances at the relevant month end and the most recent quarterly regional house price data (currently end March 2008). On this basis, the average LTV ratio of our mortgage book was 47% at the end of May 2008 (44% Dec 2007). On the same basis the average LTV of the impaired book was 61% at the end of May 2008 (57% Dec 2007). The equivalent figures for impaired mainstream and specialist mortgages were 55% (52% Dec 2007) and 69% (66% Dec 2007) respectively.
Total secured impaired loans increased to £4,953m (Dec 2007 £4,234m), 2.09% of end May 2008 balances (1.80% Dec 2007). Mortgages in arrears but not in repossession represented 1.89% of end May 2008 balances (1.67% Dec 2007).
The analysis of mortgage arrears at the end of May 2008, excluding repossessions, is shown in Table 1 below:
|
Table 1
|
Cases as a % of total mortgages
|
Value of debt as a % of total mortgages
|
|
|
End May 2008
|
End
Dec 2007
|
End May 2008
|
End
Dec 2007
|
|
Mainstream
|
1.22
|
1.16
|
1.43
|
1.33
|
|
Specialist*
|
2.36
|
1.97
|
3.09
|
2.59
|
|
TOTAL
|
1.43
|
1.30
|
1.89
|
1.67
|
*Specialist includes BTL where arrears cases, excluding repossessions, were 1.23% of total BTL mortgages at the end of the May 2008 (0.94% Dec 2007) and 1.59% of value of debt on BTL mortgages (1.28% Dec 2007). Self Certified arrears cases, excluding repossessions, were 3.11% of total Self Certified mortgages at the end of May 2008 (2.51% Dec 2007) and 3.95% of value of debt on Self Certified mortgages (3.18% Dec 2007).
Mortgages in arrears have risen in line with our expectations at the start of the year, and are consistent with our pricing and return assumptions by category at the time the loans were granted.
As shown in Table 2, total arrears levels, excluding repossessions, at the end of May 2008 were at similar levels to those in mid 2006.
|
Table 2
|
Value of debt as a % of total mortgages
|
|
|
31.12.2005
|
30.06.2006
|
31.12.2006
|
30.06.2007
|
31.12.2007
|
31.05.2008
|
|
|
%
|
%
|
%
|
%
|
%
|
%
|
|
Mainstream
|
1.73
|
1.60
|
1.46
|
1.42
|
1.33
|
1.43
|
|
Specialist
|
3.26
|
2.82
|
2.40
|
2.59
|
2.59
|
3.09
|
|
TOTAL
|
2.11
|
1.91
|
1.70
|
1.73
|
1.67
|
1.89
|
While Retail profitability in 2008 will be affected by higher secured impairment charges and increased funding costs, increased asset pricing is stabilising the net interest margin, with the potential for improvement in 2009.
Corporate
Asset growth is likely to be relatively strong in the first half-year as a consequence of the pipeline of business at the 2007 year end, the low level of churn in our book and continued inactivity in the syndications market. However, as planned, we have now slowed asset growth and expect to show single digit growth in the full year. Deposits are stable and are expected to pick up during the rest of the year.
New lending pricing has improved but the slower churn of the back book will reduce reported margins. Margins for each asset class are expected to improve with new business flows and approximately 20% of the portfolio re-pricing each year.
Whilst evidence of corporate difficulty is limited to specific sectors, our plans anticipate a continued softening in the economic climate, resulting in higher impairment charges. In a slower growth environment we have also planned for lower returns from our Corporate investment portfolio.
The cost base continues to be reviewed in recognition of the slower business environment.
There was little change in the composition of the Corporate portfolio as at the end of May 2008 compared with end December 2007, as shown in Table 3 below.
|
Table 3
Classification of advances
|
End May 2008
%
|
End Dec 2007
%
|
|
Agriculture, forestry and fishing
|
1
|
1
|
|
Energy
|
2
|
2
|
|
Manufacturing industry
|
4
|
4
|
|
Construction and property:
|
|
|
|
Property investment
|
19
|
19
|
|
Property development
|
6
|
6
|
|
Housing associations
|
3
|
3
|
|
Housebuilders
|
3
|
3
|
|
Other property
|
7
|
6
|
|
Hotels restaurants and wholesale and retail trade
|
11
|
11
|
|
Transport, storage and communication
|
6
|
6
|
|
Financial
|
5
|
5
|
|
Other services
|
11
|
13
|
|
Individuals
|
3
|
2
|
|
Non-UK residents
|
19
|
19
|
|
|
100
|
100
|
Corporate provides property sector clients with senior debt, mezzanine, loan stock and equity finance principally through the Joint Ventures and Real Estate businesses. In total, lending to the UK property sector represents some 38% of the Corporate portfolio as at the end of May 2008.
Lending secured on commercial property investment is based primarily on the quality and diversity of tenant covenants and cashflows. We have very limited evidence to date of rising tenant defaults.
For loans to finance specific commercial property investments where we are the sole lender, which accounts for around two thirds of our UK property investment lending, the collateral comprises around 9,000 properties and 24,000 units, of which 95% by value are let. They are well spread geographically throughout the UK. The largest 50 tenants account for 28% of the annual rental income. As at 31 March 2008, the indexed LTV for this portfolio was approximately 65%.
Lending and investment in the housebuilding sector at the end of May 2008 totalled £4.2bn (Dec 2007 £4.0bn), of which £3.5bn was provided in senior debt, £0.3bn in mezzanine, £0.3bn in loan stock and £0.1bn in equity finance.
The HBOS housebuilder exposure is mainly to niche sections of the market (including retirement housing, the affluent, urban regeneration and social housing) rather than volume led operators. At this point in the cycle, whilst housebuilder earnings are projected to fall, thereby impacting interest cover, debt safety is underpinned by collateral values including landbanks.
Revenues from the Corporate investment portfolio (profit on the sale of investment securities, other operating income, share of profits of associates and jointly controlled entities, less impairment of investment securities) will be, as anticipated, well below the record level achieved in 2007. The book value of the investment portfolio at the end of May 2008 was £4.8bn (Dec 2007 £4.2bn). The increase primarily reflects net additions to the portfolio, investment write downs of some £0.2bn (including £0.1bn in respect of the housebuilding sector) being substantially offset by increased valuations elsewhere.
Insurance and Investment
In Insurance, new policy sales in household and motor are growing strongly and we continue to gain market share in both sectors. Barring any repeat of the extreme weather conditions we saw in 2007, we expect claims experience to be significantly better than last year. Repayment insurance sales are more subdued given our reduced appetite for lending and adverse publicity in this market.
We continue to expect to see good profit growth in 2008 from our Investment businesses although, in line with the wider sector, new business volumes have been impacted by unfavourable market conditions and a general switch away from equity based to cash based or guaranteed products. ABI data confirms, however, that we have grown market share in both Mutual Funds and ISAs in the first quarter of the year.
We continue to believe that the prospects for the investment market remain strong with supportive demographics and we believe that our multi-brand multi-channel model, particularly our distribution strengths, will enable us to increase profitable market share in this growing market.
International
Our International businesses continue to trade well and in line with our expectations, with asset growth at a slower rate than in recent years. Pricing on new lending across all our businesses has improved.
In Australia and Ireland the customer acquisition performance from our Retail and SME expansion initiatives is encouraging. In Australia, high resource prices combined with historically low levels of unemployment are supportive of GDP growth. Impairments are rising as increases in interest rates are leading to a tightening in the credit environment. In Ireland, the housing market began to weaken in 2007. However, prudent levels of collateral are supporting both the mortgage and commercial books with impairment levels in line with expectations.
In Europe and North America, we are also being selective in our approach to new business. Impairments are on a rising trend but from a historically low base. Distribution channels in our European investment business are being expanded.
Our existing positions in each of our chosen markets give us confidence in the ability of our International businesses to deliver value over the longer term.
Treasury
Income for the year to 31 May 2008 is impacted by negative fair value adjustments in respect of securities held in the Treasury Trading Book totalling £1,028m (full year 2007, £227m).
Post tax negative fair value adjustments in the Treasury Banking Book totalling £1,825m in the year to 31 May (full year 2007, £509m) have been taken through equity in the available for sale reserves. These adjustments do not impact on reported profits or regulatory capital. At the end of May 2008 no credit impairment provisions were required.
OUTLOOK
We expect the UK economy to slow further in 2008, with a modest rise in unemployment and low interest rates, accepting that inflationary pressures will restrict the MPC's ability to reduce base rates below current levels. We now expect house prices to fall by up to 9% in 2008.
As previously indicated, asset growth is slowing and the rate of deposit growth is targeted to outstrip that for assets in 2008. We are achieving substantially better pricing on new lending in our key markets and, as a result, the decline in the net interest margin seen in 2007 is expected to moderate in 2008. We anticipate relatively stable and potentially improving margins in 2009.
First half performance will be impacted by negative fair value adjustments to the Treasury Trading Book, but we look forward to a stronger second half year. For the year as a whole we expect a resilient performance.
Appendix 1
Treasury
Table 4 provides a breakdown of the Group's debt securities (after fair value adjustments) held by Treasury:
|
Table 4
|
Banking Book
|
Trading Book
|
Total as at
|
Total as at
|
|
|
Grampian
|
Other
|
|
31/05/08
|
31/12/07
|
|
Asset Class
|
£ bn
|
£ bn
|
£ bn
|
£ bn
|
£ bn
|
|
Asset Backed Securities
|
16.6
|
9.1
|
12.5
|
38.2
|
41.9
|
|
Covered Bonds
|
|
3.2
|
|
3.2
|
3.2
|
|
Floating Rate Notes
|
|
11.9
|
5.7
|
17.6
|
15.8
|
|
Certificates of Deposit
|
|
2.1
|
13.7
|
15.8
|
16.9
|
|
Other (including Landale)
|
|
2.5
|
1.1
|
3.6
|
3.4
|
|
TOTAL
|
16.6
|
28.8
|
33.0
|
78.4
|
81.2
|
Included in Table 5 are the Group's asset backed securities, analysed as follows:
|
Table 5
|
Banking Book
|
Trading Book
|
Total as at
31/05/08
|
Total as at
31/12/07
|
Weighted Average External Credit Rating¹
(May 08)
|
Weighted Average External Credit Rating1
(Mar 08)
|
Weighted Average External Credit Rating¹
(Dec 07)
|
|
Asset Class
|
Grampian
£bn
|
Other
£bn
|
£bn
|
£bn
|
£bn
|
|
|
|
|
Mortgage Backed
|
9.1
|
3.1
|
8.0
|
20.2
|
20.8
|
1.09
|
1.07
|
1.03
|
|
CDOs
|
6.0
|
0.2
|
0.4
|
6.6
|
6.6
|
1.32
|
1.03
|
1.03
|
|
Personal Sector
|
2.8
|
0.3
|
2.2
|
5.3
|
5.3
|
1.21
|
1.13
|
1.00
|
|
FFELP Student Loans
|
|
5.6
|
0.1
|
5.7
|
5.7
|
1.00
|
1.00
|
1.00
|
|
Negative Basis2
|
|
0.5
|
2.8
|
3.3
|
3.3
|
2.54
|
1.08
|
1.00
|
|
Other ABS
And
Fair Value Adjustments
|
(1.3)
|
(0.6)
|
(1.0)
|
(2.9)
|
0.2
|
|
|
|
|
Total
|
16.6
|
9.1
|
12.5
|
38.2
|
41.9
|
1.27
|
1.08
|
1.02
|
Notes:
1The Weighted Average External Credit Rating is the lower of Moody's, Standard and Poor's and Fitch using the translation: Aaa=1; Aa1=2; Aa2=3, etc.
2Negative Basis means bonds held with a separate matching CDS protection. The Weighted Average External Credit Rating is based on the bond, ignoring the benefit of the CDS.
The quality of our Treasury portfolio remains strong and the weighted average credit rating of our ABS portfolio at the end of May 2008 is 1.27 (Dec 2007: 1.02). There is only a very small exposure to sub-prime assets. At the end of May, 95.3% of the ABS portfolio was AAA rated with 97.6 % rated AA or better.
HBOS has credit exposure to monolines both through wrapped bonds and purchased CDS protection. The Group's credit exposure at the end of May 2008, using the HBOS methodology, is £1,480m (Dec 2007: £551m).
As at 31 May 2008, the nominal exposures were £2.8bn of negative basis CDS (Dec 2007: £2.8bn) and £2.2bn of wrapped bonds (Dec 2007: £2.3bn).
Of the negative basis CDS, 77% of the underlying bonds are AAA rated, 10% AA+ rated and 13% B1 rated (with AA credit protection). Of the wrapped bonds, 86% are insured by FSA, MBIA or AMBAC and 14% by FGIC, XLCA or CIFG. Of these wrapped bonds 92% are externally rated A- or better.
Included within the mortgage backed asset class in the table above are our US mortgage backed assets, analysed before fair value adjustments as follows in Table 6:
|
Table 6
|
Banking Book
|
Trading Book
|
Total as at
|
Total as at
|
Weighted
|
Weighted
|
Weighted
|
|
Asset Class
|
Grampian
£ m
|
Other
£ m
|
£ m
|
31/05/08
£ m
|
31/12/07
£m
|
Average External Credit Rating1
(May 08)
|
Average External Credit Rating1
(Mar 08)
|
Average External Credit Rating1
(Dec 07)
|
|
Prime2
|
1,171
|
223
|
714
|
2,108
|
2,304
|
1.44
|
1.32
|
1.00
|
|
Alt-A
|
3,491
|
993
|
2,270
|
6,754
|
7,097
|
1.03
|
1.01
|
1.00
|
|
Sub-prime
|
64
|
9
|
19
|
92
|
105
|
1.16
|
1.11
|
1.00
|
|
Total
|
4,726
|
1,225
|
3,003
|
8,954
|
9,506
|
1.13
|
1.09
|
1.00
|
Notes:
1The Weighted Average External Credit Rating is the lowest of Moody's, Standard and Poor's and Fitch using the translation: Aaa=1; Aa1=2; Aa2=3, etc.
2Prime includes £584m of second lien loans to prime borrowers, all monoline wrapped.
HBOS believes that it has adopted a prudent basis for the valuation of its Treasury assets and has taken additional mark-downs for certain parts of its portfolio reflecting the illiquidity of the relevant markets. For example, the HBOS Alt-A portfolio, which is marked to 80 pence in the pound, comprises 99.5% AAA rated securities.
Contacts
Investor Relations: Charles Wycks
Director of Investor Relations
+44 (0)131 243 5509
+44 (0)20 7905 9600 (19/6/2008)
charleswycks@hbosplc.com
John Hope
Director, Investor Relations
+44 (0)131 243 5508
+44 (0)20 7905 9600 (19/6/2008)
johnhope@hbosplc.com
Press Office: Shane O'Riordain
General Manager, Group Communications
+44 (0)131 243 7195
+44 (0)7770 544585 (mobile)
Shaneo'riordain@hbosplc.com
Certain statements made in this announcement constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995.
Forward looking statements can be identified by the use of words such as 'may', 'will', 'expect', 'intend', 'estimate', 'anticipate', 'believe', 'plan', 'seek', 'continue' or similar expressions and relate to, among other things, the performance of the various business units of HBOS in the near to medium term, the amount by which HBOS expects to write down the value of certain of its assets, the expectations of HBOS in respect of the rights issue, its capital ratios and its dividend payout ratio, the business strategy of HBOS and its plans and objectives for future operations. Such statements are based on current expectations and, by their nature, are subject to a number of risks and uncertainties that could cause actual results and performance to differ materially from any expected future results or performance, expressed or implied, by the forward-looking statement. Factors that might cause forward looking statements to differ materially from actual results, include among other things, general economic conditions in the European Union, in particular in the United Kingdom, and in other countries in which HBOS has business activities or investments, including the United States; the inability of HBOS to hedge certain risks economically; the adequacy of its impairment provisions and loss reserves; and the potential exposure of HBOS to various types of market risk, such as interest rate risk, foreign exchange rate risk, credit risk and commodity and equity price risk. These forward-looking statements speak only as of the date of this announcement. The information and opinions contained in this announcement are subject to change without notice and, subject to compliance with applicable law, HBOS assumes no responsibility or obligation to update publicly or review any of the forward-looking statements contained herein.
This information is provided by RNS
The company news service from the London Stock Exchange
END
TSTBVLLFVQBXBBF
