MARKET COMMENT
HBOS: A Rising Star in UK Banking

By David Kuo (TMFDragon)
September 19, 2001

Carburton Street, London -- When the Bank of Scotland merged with Halifax Group to form HBOS (LSE: HBOS), the rationale behind the deal was simple. The Scottish bank would expand its knowledge of business banking from north of the border to the south, while Halifax would promote its expertise in the mortgage market into Scotland. Unlike mergers based solely on rationalisation and cost cutting, which can be easily measured, corporate marriages centred on cross-selling and expansion are perhaps less likely to produce immediate and discernible results -- but they should in time.

This morning, the newly formed bank posted interim numbers for the half year to June. Pre-tax profits came in at £1.5b, an improvement of 2.4% on proforma pre-tax profits for last year. The slightly improved results were largely due to a 7% surge in profits at Bank of Scotland. Profits at Halifax remained almost unchanged at £931m. HBOS has also identified £620m of cost savings resulting from merger synergies.

The main driver for progress at HBOS appears to be the improvements made at its Bank of Scotland divisions. Corporate banking activities saw a 42% surge in income helping profits in this business segment rise by £65m. But bad debt provisions have also risen significantly, up from £214m to £291m. Clearly the bank is concerned with economic developments and remarked that the group's principal area of operations remained "less buoyant" than last year.

HBOS has made no secret of its desire to make an impact on the UK banking scene. It is now the fifth largest bank in the UK, but is only a smidgen smaller than Barclays (LSE: BARC) in term of market capitalisation. However, as the country's largest mortgage lender with a specialisation in banking for small and medium sized businesses, HBOS should give the other major banks a run for their money.

Where Next?

HBOS discussion board.