Lloyds TBS Group Plc, the UK’s biggest provider of checking accounts, is in talks to buy HBOS Plc after the home lender lost three-quarters of its market value this year, according to two people familiar with the situation.
London-based Lloyds TSB would ensure its capital ratios aren’t eroded by an acquisition of Edinburgh-based HBOS, Britain’s largest mortgage lender, said the people, who didn’t disclose terms and declined to be named because the talks are confidential.
Lloyds may pay less than 300 pence a share for HBOS, valuing an acquisition at no more than £15.8 billion ($28 billion), said Ian Gordon, a London-based analyst at Exane BNP Paribas.
A combination of HBOS and Lloyds TSB would create a lender with a 28 per cent share of the UK mortgage market and £335 billion of home loans, according to the Council of Mortgage Lenders.
HBOS’s market value has plunged 84 per cent from its peak 2007 to £9 billion on concern it might be the next bank to succumb to the funding shortage that sunk Newcastle, England-based Northern Rock Plc.
“People are very concerned about HBOS’s ability to fund itself, and this would be a massive boost to Lloyds,” said Simon Maughan, an analyst at MF Global Securities Ltd in London. “Everybody has been wondering what Lloyds is going to do next. It would give Lloyds a hugely dominant franchise.”
HBOS, down as much as 52 per cent earlier in the day, recovered after the British Broadcasting Corp reported that Lloyds was considering a takeover. The shares were up 0.3 per cent at 182.6 pence at noon in London.
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‘Obvious Deal’: Lloyds TSB rose as much as 18 per cent and traded up 43.25 pence to 323 pence at noon, valuing the bank at £18.6 billion. More than 62 million Lloyd’s shares changed hands in the first two hours of trading, more than the daily average in the past three months, Bloomberg data show.
“It’s a very obvious deal,” said Ken Murray, chief executive officer at Blue Planet Investment Management in Edinburgh. He has no holdings in any UK banks. “The cost savings would be enormous because the overlap is so vast and they would end up with a very dominant position.”
Lloyds TSB spokeswoman Beth Longcroft declined to comment on a takeover, as did HBOS spokesman Shane O’Riordain. The BBC said the deal may be announced tomorrow.
HBOS, which has about 20 per cent of the UK mortgage market, gets almost half of its funding from capital markets. That compares with about 70 per cent at Northern Rock, which was nationalised by the UK government in February after triggering the first run on a British bank in more than a century.
HBOS “continues to fund its business in a satisfactory way,” the UK banking regulator, the Financial Services Authority, said today in a statement.
Acting Fast: “A deal has to be done in the next couple of days, otherwise we are back to an untenable wholesale funding position for HBOS,” said Martin Kinsler, a London-based fund manager who helps manage about $125 billion at Henderson Group Plc including Lloyds and HBOS stock.
HBOS, which employs about 72,000 people in the UK, was formed in 2001 in the £9.7-billion merger of Yorkshire-based mortgage lender Halifax Plc and Bank of Scotland in Edinburgh.
Lloyds, which gets most of its funding from customer deposits, has skirted the worst of the credit turmoil compared with peers. HBOS and Edinburgh rival Royal Bank of Scotland Group Plc were forced to sell shares and pull back lending this year to replenish capital reserves eroded by credit losses.
Lloyds CEO Eric Daniels, 57, said in July the bank will consider acquiring weakened lenders. The bank weighed a bid for Northern Rock before the lender called on the Bank of England for emergency funding in September.
Not Normal Times: Bank of England Governor Mervyn King indicated in November that UK Chancellor of the Exchequer Alistair Darling vetoed a proposal that would have allowed Lloyds to buy Northern Rock using a loan from the central bank.
Any potential takeover of HBOS would have no problem clearing government or antitrust hurdles, according to Simon Adamson, a credit analyst at CreditSights Inc in London.
“In more normal times, a tie-up between Lloyds and HBOS wouldn’t even have been considered because of the competition issues,” said Adamson. “These aren’t normal times. I can see that Lloyds might be interested in acquiring HBOS and that the authorities might be eager for them to do so.”