HBOS Results Cock-up

BEFORE THE OPEN BOOK? - In case some of you don't know - LBG has to publish accounts for HBOS for all of last year - expected on 24 Feb. I predicted a writedown about £10bn of HBOS assets - not a lot as a % of over £600bn assets in HBOS. Anyway it was opaquely calculated as discount writedown of £4bn (+ haircut that goes to corporate from treasury) that the Bank of England exerted on about £45bn of securitised assets that HBOS pledged in the Special Liquidity Scheme between June and December (compared to RBS that swapped £34bn and may have a £6bn writedown on that, and my guess would be that Lloyds did at least £10bn of a swap, but I've not confirmed that guess). Officially who swapped how much (out of £245bn pledged in return for £185bn Treasury bills) is a secret that the banks told the Treasury Committee they are not allowed to reveal, a secret reinforced by the 2009 Banking Bill currently before Parliament. By not revealing how these losses relate to the SLS swaps calculations, the markets misunderstand the published losses and consequently share values have been driven down yet again and short-sellers take their profits!
This is precisely the opposite of what was intended by the secrecy! Perhaps, someone failed to appreciate that the SLS writedowns are still writedowns, and even via the SIVs can and should still come back onto the books. But these are writedowns of perfectly normal quality RMBS and really reflect negotiating leverage more than fundamentals. The gaps between the face value of collateral pledged to the BoE and what it lends back in Treasury Bills is what funds the rest of the Government's off-budget liquidity measures for banks. The writedowns also have a tax loss aspect that pay for the BoE haircut.
What is unfair here is the loss of shareholder value just because banks cannot be fully transparent about these writedowns. Lloyds Banking Group warned today, Friday that its HBOS subsidiary would report a pre-tax loss of £10bn for full year 2008, hit by £7bn of impairments in its corporate division. The figure is significantly above estimates by analysts, e.g. Credit Suisse that expected a £4.8bn loss from the bank. But that was a rediculous assumption! larger writedowns had been predicted by lloyds as one of its first considerations on closing the takeover deal. Also, it was a no-brainer to look at how the funding gap was filled at the BoE's SLS and what that cost in writedown - this information is public and can be estimated for HBOS!
The nalysts failed to recognise what the SLS writedown would be, and consequently they make today's annoucement appear a shock, and herefore hey ho off we go short-selling! The news hit Uk banking stocks absurdly hard, with Lloyds down 40 %, Royal Bank of Scotland off 15 % and Barclays down 12 %. This is a pathetic indictment of LBG's news management and of its information exchanges with analysts.
This should not have been a surprise and should not caused these share price falls! LBG, formed by "the government-sponsored merger" (FT) of Lloyds-TSB and HBOS last year, said that pre-tax profits at the standalone Lloyds banking division (pre-merger) would be about £1.3bn, roughly in line with analysts forecasts.
But LBG say, "in the past two months HBOS had been affected by “increasingly difficult market conditions, an acceleration in the deterioration of credit quality and falls in estimated asset values”. This sheds no light at all! This is just goobledegook, what else is anything caused by these days?
This is a problem of transparency and honesty - not at all helped by the BoE (and maybe the banks too) insistence on secrecy as to who swapped what in the SLS.
And, what is meant by the "past two months" - is this a caveat to get out from accusation that such information should have informed the Dec 12 shareholders meeting? These value adjustments are not because of just the past two months! It said the impairments were some £1.6bn higher than it had expected when it unveiled the merger last November. But this expectation was not made public. The losses were mainly driven by a £4bn hit from “market dislocation” (read SLS swap discounting and overlaps with...) and approximately £7bn of impairments in HBOS’s corporate division. As a result, Lloyds said that underlying pre-tax losses at HBOS would be £8.5bn, which when combined with impairments and ancillary losses would total £10bn. There will be an additional £900m tax charge on top of this.
Eric Daniels, chief executive, said in a statement: ”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." Not clear, not helpful, therefore a damaging way to state matters! Are these loans gone bad that we already know about or new deteriorations or corporate bonds writedowns? Or, does Corporate include Treasury?
The bank says these impairments "primarily reflect the application of a more conservative recognition of risk and the further deterioration in the economic environment.” This contradicts the statements to shareholders at the Dec 12 EGM when Stevenson said the only problem is funding - therefore the only dislocation loss has to be the collateral writedown by the Bank of England at the SLS windows - it is the BoE's application of a more conservative recognition of risk !Lloyds said its core tier 1 capital ratio at the end of the year was in the range of between 6-6.5 % in excess of its regulatory capital requirements.