Shares in Royal Bank of Scotland, Lloyds TSB and HBOS have fallen sharply despite the UK government’s £37bn rescue package for the three banks.

The plan is meant to secure the banks’ futures, but it also means profits will have to be shared with the government.

In addition, the injection of taxpayers’ money will mean that the banks will not be paying dividends to their shareholders.

HBOS closed down 27.5%, Lloyds TSB was 14.5% lower and RBS down 8.4%.

BBC business editor Robert Peston said the banks faced “absolute humiliation”.

It would “count as perhaps the most extraordinary day in British banking history”, he added.

Paul Kavanagh, at the brokers Killik & Co said: “It’s good news for the banking system, but it’s not necessarily good news for share prices of the banks”.

“One thing the banks have had to concede is to stop paying dividends. Many bank shareholders are the big income funds and they’ve been selling them today.”

‘Extraordinary times’

RBS will receive £20bn of taxpayers’ money with a further £17bn to be put into HBOS and Lloyds TSB. Barclays intends to raise £6.5bn without government help.

“It’s immensely regretful we’re coming to shareholders to raise funds again, it’s something we feel bad about” Sir Tom McKillop RBS chairman

Taxpayers will own about 60% of RBS and 40% of the merged Lloyds TSB and HBOS.

The government will also get a say in how the three banks are run, and executives will see their cash bonuses limited or forbidden.

Chancellor Alistair Darling told MPs that the rescue package contained: “essential steps in helping the people and businesses of this country and supporting the economy as a whole”.

Prime Minister Gordon Brown said the bail-out was: “unprecedented but essential for all of us”, and would thaw frozen money markets.

“In extraordinary times, with financial markets ceasing to work, the government cannot just leave people on their own to be buffeted about,” he added.

‘Surgical approach’

Mr Brown insisted the investments were assets and, “not just money being pumped in”, adding the government intended to sell the investments at some point.

The measures needed to be accompanied by international banking system reforms, he added.

“We must now put in place new structures and new rules for the future. This cannot simply be a short-term rescue to paper over the cracks. Only a surgical approach that gets to the root of the problem will now work to ensure the problems do not return.”

The Treasury cash forms part of the government rescue plan announced last week.

Management shake-up

As part of the banks’ announcements:

– RBS said chief executive Fred Goodwin was quitting with immediate effect – without a severance pay-off. He will be replaced by British Land boss Stephen Hester. RBS chairman Tom McKillop is to retire.
– Lloyds and HBOS said they had renegotiated their merger, reducing the number of Lloyds TSB shares that HBOS shareholders will receive.
– HBOS chief executive Andy Hornby and chairman Lord Dennis Stevenson said they would stand down from their posts after the merger with Lloyds TSB was complete. Neither will take any extra payments when they leave.
– RBS and Lloyds TSB/HBOS will return mortgage and small-business lending to 2007 levels, which is much more than they are currently lending.

“It’s not wrong to call it nationalisation but it’s very different from Northern Rock. Shareholders will continue to own a big chunk of the banks” Robert Peston BBC Business Editor

Other developments included:

– Major central banks saying they would offer financial institutions an unlimited amount of short-term dollar loans to help stem the crisis.
- London’s FTSE 100 index rising by about 5% as investors reacted to the news, though banking shares were mixed.
– As a condition of the deal, the government has insisted that senior directors should get no cash bonuses this year, with future bonuses to be paid in the form of shares – a move aimed at encouraging management to take a more long-term approach.

Dividend cancelled

The government will buy £5bn of preference shares in RBS and another £15bn of ordinary shares if, as many expect, the bank is unable to find willing private investors.

BANKS AND THEIR BAIL-OUTS
RBS – £20bn (government takes 60% stake)
Lloyds TSB/HBOS – £17bn* (government takes 40% stake)
*dependent on merger being completed

Check UK bank shares

“It’s immensely regretful we’re coming to shareholders to raise funds again, it’s something we feel bad about,” said RBS chairman Sir Tom McKillop. “We cannot help but feel contrition.”

HBOS will raise £11.5bn from taxpayers, made up of £8.5bn in ordinary shares and £3bn in preference shares, while Lloyds TSB is to get £5.5bn.

The money is conditional on the merger of the banks going through.

Lloyds TSB and HBOS said the deal was still on, but that the terms had been renegotiated.

A £12.2bn deal was agreed last month, but the value of HBOS shares has since plunged and the extent of the recapitalisation has highlighted its weakness.

Under the revised deal, HBOS shareholders will get 0.605 Lloyds TSB shares for every HBOS share they hold. Under the original deal they would have received 0.83 Lloyds TSB shares.

‘No Rock’

Barclays has said it is to raise £6.5bn of new capital. The bank is to raise the money from private investors, rather than going to the government.

Barclays also said it would scrap its final dividend payout for 2008, saving it £2bn.

Our business editor said it was not wrong to describe the part-ownership of RBS, Lloyds TSB and HBOS as nationalisation, but the situation was very different from Northern Rock and Bradford and Bingley, which had seen private investors lose their holding.

“Shareholders will continue to own a big chunk of the banks,” he said.

News reported by The BBC

The FTSE 100 share index has closed more than 400 points higher, its biggest one-day rise, after the US confirmed a financial bail-out plan.

It ended the day 8.8% higher at 5311.3 points. But after a turbulent week on the markets, the FTSE was 105 points lower than its value on Monday.

Banking shares were amongst the biggest gainers, with Royal Bank of Scotland up 32% and Barclays and HBOS both up 29%.

They were helped by a ban on short-selling of financial shares.

“The breathtaking rises in the price of bank shares this morning are symptomatic of a stock market that is bereft of reason and is being driven almost purely by fear and momentum.” BBC Business Editor Robert Peston

What is short-selling?
See banking sector shares

The restriction was announced late on Thursday by the Financial Services Authority (FSA) which banned short-selling in a number of financial shares.

Short-selling involves traders profiting from falling share prices. The technique works when investors borrow shares from another investor, and then sell them hoping the price will fall.

The aim is then to buy back the asset at a lower price and return it to its owner, pocketing the difference.

Previously anyone could short a position in a company’s shares, but typically hedge funds were the main players.

The temporary ban on short-selling applies to 29 financial stocks.

It was introduced by the FSA due to concerns that short-selling had been a contributory factor in the sharp falls in HBOS shares before it was rescued by Lloyds TSB.

The ban, which came into force at midnight on Thursday, will last until 16 January but the FSA will review its operation in 30 days.

Short-selling in layman’s terms
“While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets,” said FSA chief executive Hector Sants.

Paul Edmondson of City lawyers CMS Cameron McKenna said he wasn’t sure if the ban on short-selling had been “fully thought through”.

“The move is obviously intended to stop further speculative attacks on bank share prices,” he said.

“Politically that must make sense – a perception of stability in the markets has to be a good thing and speculators’ profits are not a political priority.

“Unfortunately, the fact is that short sellers provide a lot of the liquidity in the market which will now disappear.”

The UK short-selling ban applies to shares in the following companies – Admiral, Alliance & Leicester, Alliance Trust, Arbuthnot, Aviva, Barclays, Bradford & Bingley, Brit Insurance, Chesnara, European Islamic Investment Bank, Friends Provident, HBOS, Highway Insurance, HSBC, Islamic Bank of Britain, Just Retirement Holdings, Legal & General, Lloyds TSB, London Scottish, Novae, Old Mutual, Prudential, Resolution, Royal Bank of Scotland Group, RSA Insurance, St James’s Place, Standard Chartered, Standard Life, and Tawa.

News reported by The BBC

The future of thousands of jobs is in the balance in the wake of Lloyds TSB’s £12.2bn takeover of Halifax Bank of Scotland (HBOS).

While Lloyds dismissed claims that up to 40,000 jobs faced the axe as “ridiculous”, it refused to rule out compulsory redundancies.

The takeover will lead to cost savings of more than £1bn, Lloyds added.

Meanwhile the global markets were calmer after central banks pumped billions of dollars in extra funds.

The UK government also said it is “determined” to ensure the stability of the financial system and protect savers.

Gordon Brown pledged to “do everything to protect depositors in Britain, who need to have confidence in the banking system”.

The takeover by Lloyds TSB values shares in HBOS at 232p each.

By close of trade in London on Thursday, when the deal was announced, shares in HBOS closed up 17%, at 172p, while Lloyds shares shed 17.7% to 253p.

Turmoil

The deal comes as a crisis of confidence on global financial markets has wreaked havoc in recent days:

Gordon Brown said the decision was ‘right’

– A lack of funding has forced global central banks to pump billions of extra dollars into money markets
Russia’s main stock markets have been suspended for two days in a bid to prevent a meltdown after steep falls in share prices
– Banks around the world have admitted they could lose millions after the collapse of US investment bank Lehman Brothers
– The Federal Reserve rescued AIG with an $85bn (£48bn) package amid fears the group, once the world’s largest insurer, could collapse
– Bank of America bought investment bank Merrill Lynch in a $50bn deal earlier this week, another sign of the upheaval of the financial sector
– Meanwhile, the UK’s economic picture remain glum, with latest figures showing mortgage lending slumped again in August
– US President George W Bush sought to soothe nerves by announcing that authorities would closely monitor markets
– The UK’s Financial Services Authority has announced steps to restrict short-selling of shares

Deal welcomed

Effectively the buy-out of HBOS is a rescue deal after its shares plummeted recently amid concerns over the firm’s future.

Under the terms of the deal – which must be agreed by shareholders – HBOS shareholders will receive 0.83 Lloyds shares for every HBOS share.

LLOYDS vs HBOS
Branches – Lloyds 1,900; HBOS 1,100
Customers – Lloyds 16 million; HBOS 22 million
Employees – Lloyds 70,000; HBOS 72,000
Savings – Lloyds is the UK’s fourth largest savings bank; HBOS is the market leader
Retail savings balance – Lloyds £65bn; HBOS £139bn

“This will be a unique opportunity to accelerate and extend our strategy and create the UK’s leading financial services group,” said Lloyds chairman Sir Victor Blank.

Lloyds chief executive Eric Daniels said “You have the largest savings bank, you have the largest current account provider, you have two terrific distribution networks.”

According to the deal agreement “significant cost savings can be made by combining the networks and back offices of Lloyds TSB and HBOS”.

Under the cost saving plan retail branches will be cut, while head office posts, human resources and finance and legal departments will also face cuts.

Analysts have suggested that up to 40,000 jobs could go, but banking consultant Jonathan Charley said HBOS was under pressure not to make such deep cuts.

He estimated that 10% of the combined workforce, or about 14,000 posts, could be cut.

Competition fears

BBC business editor Robert Peston said the government had opted to push through the Lloyds TSB-HBOS tie-up after HBOS voiced concerns that depositors and lenders had begun to withdraw their credit from the bank.

Declan Curry goes through the main points of the deal

Earlier Chancellor Alistair Darling said the government would allow the HBOS-Lloyds TSB deal because financial stability “must trump” competition fears.

But he denied that the authorities had rushed through the transaction.

“It didn’t just suddenly happen,” he told the BBC.

City watchdog, the Financial Services Authority (FSA) welcomed the merger saying it would “enhance stability within financial markets and improve confidence among customers and investors in the UK financial sector”.

“I’m worried by banks merging. Too much money in one pot is dangerous.” Stephen, London

Send us your commentsConcerns about HBOS’s security were so great that even the prime minister was involved in pushing through the deal, our business editor said.

“There were growing concerns in the HBOS boardroom that a climate of fear was being created about its future that could have led to a funding crisis, or a Northern Rock-style run – on steroids,” he said.

Market leader

Meanwhile, Mr Daniels – who will take over the helm of the new firm – was keen to stress that the takeover had not been forced on HBOS.

“There shouldn’t be any impression this is a shotgun marriage or a forced marriage, this is something that’s been looked at for a good long while,” he said. This is the right transaction for HBOS and its shareholders

Dennis Stevenson, HBOS chairman

Lloyds added that the takeover was part of its strategy to build “the UK’s leading finance company”, adding that it also intends to increase the number of competitive mortgages on offer for first-time home buyers.

The creation of such a large bank, which will hold a third of the UK mortgage and savings market, would not normally be allowed under competition rules say analysts.

But the deal was backed by the government, using a special national interest clause, on the grounds that a collapse of HBOS would have had a disastrous impact on the UK.

However, Lloyds chairman Sir Victor Blank did say the Office of Fair Trading would look “very carefully” at the business if it discovered any market abuses in the future.

Scottish focus

The group also moved to allay fears that the takeover would mean a blow to Scotland where HBOS is currently based.

Lloyds said the new group would continue to use The Mound – HBOS’s corporate headquarters – in Scotland, continue to hold annual general meetings in Scotland and carry on printing Bank of Scotland notes.

“In addition the management’s focus is to keep jobs in Scotland,” it added.

HBOS chief Andy Hornby will remain with the company, but his role has not been decided.

“Against the backdrop of the very high levels of volatility our industry is experiencing, the combined group will be one of the strongest players in the UK financial services sector.

News reported by The BBC

Shares in UK bank HBOS led a decline in banking stocks as turmoil on the financial markets triggered by the collapse of Lehman Brothers continued.

Investors are concerned that HBOS is too dependent on money markets to fund its lending as the cost of borrowing shoots up.

Shares in HBOS closed down 21.7%, or 50.5 pence at 182p. Earlier in the day the shares were down 34%.

In a statement, HBOS said it had a “strong capital base”.

Ratings agency Standard & Poor’s lowered its credit rating on HBOS. It said the bank’s credit risk was higher than some of its rivals because high loan-to-value and specialist mortgages made up a “sizeable” part of its mortgage book.

S&P also said that the ratio of loans to customer deposits at HBOS was higher than many of its similarly rated peers, making it more vulnerable to rises in borrowing costs on the money markets.

Confidence

HBOS, the biggest UK mortgage lender, was the biggest decliner in the FTSE 100 index.

Not far behind was Royal Bank of Scotland, whose shares ended down 10.2% at 189.1p. Barclays fared better, its shares closed down 2.53% at 308p.

The interest rates at which banks lend to each have risen sharply since Lehman’s dramatic collapse over the weekend, suggesting that banks are losing confidence in each other.

Overnight sterling Libor increased from 5.5% to 6.8%, and the dollar Libor rate increased from 3.1% to 6.4%.

HBOS said on Monday that the group had the strongest capital ratio of all the major UK domestic banks.

“As we reported at the interim results, we are comfortable with our funding profile. We have access to a diverse range of funding sources and that hasn’t changed,” it added.

HBOS was created in September 2001 following the merger of the Halifax and Bank of Scotland.

News reported by The BBC

The credit crunch is likely to last well into 2010, the head of the UK’s largest mortgage provider has warned.

HBOS chief Andy Hornby told the BBC it would take 18 months before US house prices started to rise again.

That was needed “to give the confidence back into the system for banks to start lending again,” he said.

His comments suggested there was little that the UK Government could do to stimulate the markets, the BBC’s business editor Robert Peston said.

‘Confidence needed’

Mr Hornby – whose bank owns the Halifax and Bank of Scotland – said British banks would continue to suffer major problems in offering loans until they could once again raise significant sums on wholesale financial markets.

“It (the credit crunch) will take a long time to play out” Andy Hornby Chief executive, HBOS

About two-thirds of wholesale funding received by UK banks comes from overseas – primarily from the US.

And the HBOS chief said that US money-market investors would not resume channelling of money to UK banks for mortgage-lending until US house prices started to recover – a process he said was set to last well into 2010.

“My personal view, for what it’s worth, is that it will take 18 months to play through the system,” Mr Hornby told our business editor in the latest of his Leading Questions programmes.

“It’s going to take 18 months before US house prices have started to rise again – which is what’s required for banks to have the confidence to start lending again.

“It will take a long time to play out.”

Adds to gloom

Mr Hornby added that there was “no doubt” that the UK was to see house price deflation on a scale not seen since the early 1990′s.

But he added that unemployment – a factor which underpins people’s abilities to pay their mortgages – would not reach the highs of that era.

His comments add to a gloomy week of economic news, following chancellor Alistair Darling saying that the economic times faced globally “were arguably the worst they’ve been in 60 years”.

Separately, the Organisation for Economic Cooperation and Development (OECD) has forecast that the UK economy will fall into recession this year – comments which sent sterling to its lowest level against the dollar since early 2006.

Meanwhile London’s index of leading blue-chip shares, the FTSE 100, lost 7% in value this week – its largest fall since July 2002.

Too dependent

“Mr Hornby also implies that there’s little the government can do to restore positive momentum to the economy” Robert Peston BBC Business Editor

Mr Hornby’s assessment implied that the government could do little to persuade UK banks to start providing more normal amounts of loans to homebuyers and businesses, our business editor said.

“Since it was the reduction in the availability of credit that precipitated the economic slowdown in the UK, Mr Hornby also implies that there’s little the Government can do to restore positive momentum to the economy.”

Many argue that the prime cause of the credit crunch in the UK was that banks had become too dependent on selling their mortgages to global investors in the form of mortgage-backed securities.

So the sudden unavailability of these deals deprived UK banks of much of the finance they needed – something which led to the eventual nationalisation of Northern Rock.

Many banks have taken efforts to shore up their balance sheets during the credit crisis.

HBOS raised £4bn in a rights issue, but largely from underwriters after the majority of shareholders snubbed the deal.

It also saw profits before tax fall 72% in the first six months of 2008 against the background of the crisis and a tougher economic climate.

News reported by The BBC

HBOS has frozen the accounts of Andy Hornby, its chief executive, after a thief stole his identification details and withdrew thousands of pounds in cash.

Mr Hornby, who earned £1.7m last year, is said to have been told the news while on holiday.

Fraud investigators are now poring over Mr Hornby’s accounts to work out how much money has been stolen.

The thief is believed to have obtained one of Mr Hornby’s bank statements and used it to pose as the 41-year-old chief, stealing up to £7,000 in one day.

The fraudster is said to have been filmed on CCTV withdrawing cash from bank branches and from an ATM machine.

The embarrassing episode adds to a gruelling year for Mr Hornby, who has had to face shareholder unrest since HBOS launched a £4bn rights issue in April. It is not known for how long the fraudster had access to the accounts before staff became aware of the theft.

The good news for Mr Hornby is that he will probably be eligible for a refund from HBOS. The bank said that, like all lenders, it will generally reimburse customers who are victims of fraud if they have taken sufficient care to safeguard their details. Banks advise their customers to shred financial documents and to keep those that are not shredded in a safe place.

HBOS declined to discuss Mr Hornby’s case, saying that the bank never commented on an individual customer’s affairs.

Mr Hornby is the second UK bank boss to fall victim to fraud so far this year.

Marcus Agius, the chairman of Barclays, had £10,000 stolen from his account in January by an identity thief who obtained a credit card in his name. Financial fraud has rocketed in recent years as criminals target bank customers’ personal data.

The Financial Services Authority has highlighted such fraud as a key threat to the financial industry and has told banks to increase vigilance.

Mr Hornby became HBOS chief executive two years ago. He has spent the past year dealing with the effects on the industry of the credit crunch and the economic slowdown.

The Oxford-educated former management consultant joined Halifax from Asda in 1999 as head of retail banking and stayed in that job after the country’s biggest mortgage lender merged with Bank of Scotland in 2001.

As the rising star of UK retail banking, he was awarded £2.2m in shares by HBOS in 2002 to stop him from joining Boots as chief executive.

News reported by The Independent

Bradford & Bingley (B&B) has said that more than a quarter of the shares offered under its £400m rights issue have been bought by shareholders.

The bank said that 27.8% of its new shares, which were on offer at 55p each, had been taken up by investors.

Other UK banks, including HBOS, Royal Bank of Scotland and Barclays, have sought to raise extra cash after being hit by the credit crunch.

Separately, B&B announced Richard Pym as its new chief executive.

Lacklustre performance

Despite B&B’s rights issue proving more successful than some recent rights issues by other banks, almost £300m of its new shares will be left with underwriters.

The underwriters – Citi and UBS – will now try to place the remaining shares by Friday.

The two investment banks are being supported by four major shareholders and six banks – HSBC, Lloyds TSB, HBOS, Barclays, Abbey and Royal Bank of Scotland. This could mean that some of the UK’s main High Street banks will end up owning a chunk of B&B.

The news comes as B&B announced it had appointed Richard Pym its new chief executive with immediate effect.

Mr Pym was a former group chief executive at Alliance & Leicester and retired in July 2007.

He is currently an independent non-executive director of asset management group Old Mutual and a non-executive chairman of car parts retailer Halfords.

Despite Mr Pym’s credentials, he is likely to face a tough ride at B&B, observers say.

“[Mr] Pym is a safe pair of hands, in our view, to try to shepherd B&B through the coming asset quality problems we feel it will suffer. However, we also feel he can do little to avert said problems,” said Collins Stewart analyst Alex Potter.

Troubled rights-issue

B&B’s rights issue has been restructured twice. The bank first announced an attempt to sell shares at 82p in May.

Then, as trading took a turn for the worse, B&B announced it had decided to sell a 23% stake in the firm to Texas Pacific, but the private equity firm later backed out.

WHAT IS A RIGHTS ISSUE?
Companies issue extra shares to raise money
They are offered to existing shareholders, usually at a discount to the current share price
Shares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones

Earlier this year, the Royal Bank of Scotland raised £12bn from its shareholders with a strong take-up in its rights issue of around 95%.

Barclays secured £4.5bn in new funding from a range of foreign investors, but only 19% of its new shares were taken up by existing investors.

Last month, HBOS said that only 8% of the new shares on offer were taken up in its £4bn rights issue.

In its statement, B&B added that there had been “no material change” in either current trading or the outlook for the company.

It is scheduled to release its six month results to 30 June on 29 August.

News reported by The BBC

A £400m rights issue at Bradford & Bingley (B&B) has closed, with analysts expecting that some of the deal’s underwriters will end up with shares.

Shares in B&B were trading at 55.25p when the deadline for the cash call finished on Friday – just above the 55p offer price for existing investors.

The take-up is forecast to be modest – though higher than the 8% seen last month in a rights issue by HBOS.

B&B, a buy-to-let loans specialist, has been hit hard by the credit crunch.

It is not expected to reveal how many shareholders took up the offer to buy extra shares until Monday.

The rights issue was underwritten by banks including Citi and UBS, along with HSBC, Lloyds TSB, HBOS, Barclays, Abbey and the Royal Bank of Scotland.

WHAT IS A RIGHTS ISSUE?
Companies issue extra shares to raise money
They are offered to existing shareholders, usually at a discount to the current share price
Shares are offered in proportion to existing holdings, so if you own 10% of the old shares you are offered 10% of the new ones

Rival cash calls

B&B’s rights issue has been restructured twice. The bank first announced an attempt to sell shares at 82p in May. Then, as trading took a turn for the worse, B&B announced it had decided to sell a 23% stake in the firm to Texas Pacific, but the private equity firm later backed out.

Earlier this year the Royal Bank of Scotland raised £12bn from its shareholders with a strong take-up in its rights issue.

Meanwhile Barclays has secured £4.5bn in new funding from a range of foreign investors.

Barclays announced last month that 19% of its new shares had been taken up by existing investors.

News reported by The BBC

HBOS is to cut 325 jobs by the end of March next year as it closes one of its specialist mortgage brands.

One arm of HBOS, The Mortgage Business (TMB), will close to new custom at 8pm on 22 August and a mortgage processing centre will also be shut.

Unions described the job losses, which they claim are larger than HBOS has admitted, as a “blow”.

On 31 July, HBOS announced that profits before tax fell 72% in the first six months of the year.

The firm said first-half profits dropped to £848m from £2.96bn in the same period a year earlier.

Job losses

A spokesman for HBOS claimed the move was an attempt to “streamline” the business. The aim was for jobs to be cut through natural turnover and voluntary redundancies.

“We are never happy about any reduction in roles in HBOS even if we understand the commercial logic for the changes” Ged Nichols, Accord

The Unite and Accord unions said closure of the processing centre would affect jobs in Chester, Cardiff and Livingston.

Computer jobs in Edinburgh, Chester and West Yorkshire would also be affected.

“This is a further blow for jobs in the UK financial services sector which is being brought about by the credit crunch and the changing economic climate,” said Graham Goddard, deputy general secretary of Unite.

He added that many workers in the financial services sector earned between £15,000 and £18,000.

“We are never happy about any reduction in roles in HBOS even if we understand the commercial logic for the changes,” said Ged Nichols, of Accord – which is a union for HBOS employees.

HBOS has five mortgage brands – Halifax, Bank of Scotland, Birmingham Midshires, TMB and Intelligent Finance.

TMB tended to specialise in buy-to-let and self-certification mortgages. Customers with an existing TMB mortgage would be unaffected by the changes, HBOS said.

HBOS also added that its specialist offset mortgage provider Intelligent Finance would be concentrating on its core business, with all offset mortgages sold with a requirement to include savings and a current account.

Online banking products from Intelligent Finance, other than savings, would no longer be offered.

News reported by The BBC

UK banking group HBOS has seen profits before tax fall 72% in the first six months of the year, amid a credit crisis and a tougher economic climate.

The firm said first-half profits dropped to £848m from £2.96bn in the same period a year earlier.

Bad debts rose 36% to £1.31bn as customers failed to repay loans.

But the firm, which recently completed a £4bn share sale, said it was better placed to operate in the “more challenging economic environment”.

Mortgage defaults

Despite the drop in profits, HBOS shares rose nearly 8% in early trading in London, with analysts voicing cautious optimism about its earnings report.

“Probably the most worrying trend is a rise of £225m in charges on mortgages where the borrowers are having trouble keeping up the payments” Robert Peston, BBC business editor

Robert Peston, the BBC’s business editor, said the HBOS results might have sounded dreadful, but the drop in earnings was only slightly more than was reported on Wednesday by UK banking rival Lloyds TSB.

A day earlier Lloyds TSB said profits had fallen 70% to £599m because of the global market volatility, down from a profit of £1.99bn in first half of 2007.

Our correspondent said “probably the most worrying trend was an increase of £225m in charges on mortgages where the borrowers were having trouble keeping up with their repayments”.

HBOS said the value of mortgages it classed as being impaired had risen 21% to £5.1bn.

Losses on loans and advances increased by 36% to £1.3bn in the first half.

Wider slowdown

The firm said the problems seen in UK and global financial markets during the first half of 2008 had evolved into a “wider economic slowdown” after access to funds had become more limited and more expensive.

HBOS said its underlying profits before tax including some accounting adjustments were down 51% at £1.45bn during the first six months of 2008.

Richard Hargreaves of Hargreaves Lansdown Stockbrokers said: “Concerns still linger in the form of the group’s exposure to the UK environment and, in particular, the buy to let market in which Halifax is a major player.”

“Further disposals of assets have not been ruled out of the price is right, and if the economic landscape deteriorates sufficiently.

HBOS recently launched a rights issue in a bid to improve its balance sheet, but only 8.29% of the new shares offered in its £4bn rights issue were taken up.

News reported by The BBC