I doubt Cummings will be speaking to anyone in the media today, so I may as well speak for him. In 2007 HBOS corporate loans were £96.5bn and grew to £117.8bn by mid 2008 with only £44.7bn corporate deposits, so there was a £72.2bn 'funding gap' that had to be funded by swapping loans wrapped up as bonds with the Bank of England SLS in exchange for treasury bills. The Bank of England applied write-downs of about 10% giving a write-down loss to HBOS books of £7bn, which agrees with what LGB say is the loss of the HBOS Corporate Division!
In 2007 real estate was said to have made more for HBOS than personal banking, earning Peter Cummings £2.6 million. This is something of a misalignment. Clearly, when mortgages are included property makes more than everything else. But. that also means a possible over-concentration, even if property is somewhere in everything banks do and lend to and borrow against. One unfortunate result of the passion for property is that manufacturing and other industry that is not property based get less and indeed in HBOS's case got proportionately far too little, and this was the cause of much of Scotland's economic weakness and general loss over recent decades.
So when Eric Daniels of Lloyds says in the interim trading statement yesterday that HBOS made an underlying loss of £8.5 billion but this widened to some £11 billion after other factors such as goodwill write-offs are included, and that some £7 billion of losses came in the HBOS corporate division led by Peter Cummings, what does this really mean? HBOS 2008 losses - compare with a profit of £5.7 billion in 2007, which should be the order of the underlying trading profit continuing into 2008 less maybe only a couple of £ billion of actual closed out losses. After all, the bank has over £600 billion of assets and by mid-2008 was showing £3.8bn net profit after over £16bn of impairments, of which over £13bn were in the trading book, and we know those could recover, as indeed all other losses are expected to recover 55% at least.
When Peter Cummings left HBOS at the same time as Andy Hornby, Peter got £6m added to his pension plus his severance, possibly another £2.6m? That should give him a nice £60k a month income, similar to Hornby's monthly consultancy with LBG. Does he deserve that? Probably not! What will be done about that? Probably not much?
More important for shareholders is that stock market and media reaction to HBOS interim results is absurd. £10bn of wite-downs were anticipated months ago in hints given out by Lloyds as to what it would do once the takeover of HBOS was complete. So, even if Lloyds have said the result is "some £1.6 billion higher than our expectations... at the beginning of November last year" that possibly just means they under-estimated how much the Bank of England would write-down? The "... £4 billion impact of market dislocation and approximately £7 billion of impairments... driven by deterioration in asset quality and falling market valuations... " will reflect the asset discounts and 'haircuts' from about £45bn of HBOS asset backed securities swapped in the Bank of England Special Liquidity Scheme between June and December.
These are not exactly signs of deterioration in the underlying profitability of the bank. Probably a quarter to possibly over half of the write-downs will be recovered over 1-3 years. Otherwise, all this is actually a positive sign of replenishing the LBG (and HBOS) bank's 'funding gap'.
Lloyds have made a commercially very profitable and astute deal by buying HBOS, but they have handled their interim trading announcement badly and damaged all UK banks share prices by not explaining the truth more fully.
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