By Clara Ferreira-Marques
LONDON (Reuters) - British bank HBOS (HBOS) confirmed on Thursday it was trading in line with expectations, but warned higher writedowns would hit first-half performance, as a sharper fall in house prices puts pressure on bad debts.
However, Britain's biggest mortgage lender said it was passing on more of its higher funding costs through better pricing on new lending, and forecast a slower decline in margins than in 2007, before margins stabilize or improve next year.
Shares in the bank, however, fell more than 4 percent in early trade, hit by the worsening economic outlook and volatility ahead of a planned rights issue. At 3:45 a.m. EDT the stock was down 3.8 percent at 306.5 pence, underperforming a virtually flat FTSE blue-chip index.
Concerns over a planned 4 billion pound ($7.8 billion) cash call battered HBOS shares last week, with the bank forced to issue a reassuring statement to the market just days after a rival bank announced plans to slash the price of its own rights issue.
But Chief Executive Andy Hornby said on Thursday that HBOS was on track and brushed off worries of market "indigestion" from a surfeit of rights issues as banks ask their shareholders for cash to bolster their balance sheets.
"We're underwritten, and this rights issue is going ahead. It's as simple as that. We are not for turning," Hornby said.
"Strong capital ratios are going to be essential for the next three to four years, and banks with strong capital ratios are going to have a competitive advantage," he told Reuters.
HBOS expects its core tier 1 ratio, already better than UK rivals before the cash call, to rise to 6 to 7 percent.
HOUSE PRICE WEAKNESS
HBOS said it now expects UK house prices to fall by up to 9 percent in 2008 as the number of deals plunge -- down from a previous forecast in late April of a mid-single-digit percentage decline, and said this would entail impairment charges.
It also became one of the first banks to warn of a "modest rise" in unemployment, which could also push up arrears.
Arrears remained in line with HBOS expectations, but the bank saw levels worsen from 1.67 percent at the end of 2007 to 1.89 percent at end-May, with arrears in specialist buy-to-let loans rising to 1.59 percent, above levels seen at embattled rival lender B&B.
Writedowns in the bank's treasury trading book increased marginally from its late April trading update to 1.028 billion pounds, but the bank stopped short of writing down the value of lending to Britain's embattled housebuilding sector.
Hornby said the group had halved its equity exposure to the sector by writing it down to 0.1 billion pounds, but that the debt was underpinned by collateral including landbanks.
"I am confident we have taken a prudent view of the book at the moment," he said.
HBOS's loans and investment in housebuilding represent less than 1 percent of the group's balance sheet, but its stakes in groups including Crest Nicholson, McCarthy & Stone, Countryside Properties, Miller Group and Tulloch, have become a growing concern for analysts.
HBOS expanded its exposure to residential property developers in recent years in the wake of ambitious government housebuilding targets, especially in and around London.
(Additional reporting by Mark Potter, editing by Will Waterman)
