We're nearing the backend of the bank reporting season. Today it was the turn of HBOS, the UK's biggest mortgage lender, to tell us how much profits have fallen...
Another day, another bank statement.
Thankfully we're nearing the backend of the bank reporting season. So, if you're fed up with hearing from all those lenders who have contrived to lose grillions while self righteously lecturing the rest of us on the need for belt tightening...relief is at hand!
Today HBOS
(LSE: HBOS)
, the UK's biggest mortgage lender, admitted a 9% second-half profit fall after writing down...yes, you've guessed it...the valuation of its subprime investments.
And apparently, conditions in 2008 remain "uncertain".
The group, which includes both the Halifax and the Bank of Scotland, revealed that second-half net income dropped from £2.12bn to £1.93bn. Earnings per share slid 8% to 50.9p but turned out slightly better than consensus analyst estimates.
Pre-tax profits climbed 31% at the corporate division, but declined 13% on the consumer side.
For 2007 as a whole, underlying profits ticked up 3% and earnings per share 6%. The final dividend was hiked 16% to 32.3p, giving an 18% payout uplift for the full year.
The bad debt picture was mixed. So-called retail impairment losses were only £28m compared with £108m a year ago, but the hit on the corporate book jumped to 0.61% of advances compared with 0.5% a year earlier.
The bottom line was hurt by a £227m write down related to asset-backed securities like mortgages, although the lender expects this "fair value adjustment" to reverse over time. The bank also lowered the valuation of its debt securities by £509m, an adjustment that apparently doesn't affect profits.
Higher funding costs stemming from subprime turbulence restrained lending growth and eroded profit margins, said HBOS, which scrapped its mortgage lending targets in October.
And it seems there's no upturn on the horizon...
"Current turmoil in global financial markets introduces considerable uncertainty into the plans of all financial institutions", comments HBOS, adding that things are likely to stay that way for the whole year.
So what does that really imply for the group in 2008?
In HBOS' favour, lower exposure to US subprime mortgages means that the bank's write downs compare favourably with the damage at Barclays
(LSE: BARC)
and Royal Bank of Scotland
(LSE: RBS)
of £1.64bn and £1.25bn respectively.
But with a 15% share of net new mortgage lending in 2007, just down on 2006's 17%, HBOS has the biggest exposure to the UK's home loan market. Although Halifax is taking a cautious stance by not chasing after market share at the expense of profit, it does expect house prices to remain flat this year.
That sounds like a rather over-optimistic assessment.
Don't just take my view, look at what's been happening to housebuilders' share prices to see what the stock market thinks about residential property prospects in Britain. Not good.
As the credit crunch bites harder, HBOS is almost bound to feel the fallout as mortgage defaults rise.
Is the price factoring in all the bad news? Getting there, in my view, but not yet.
The shares have undershot the FTSE 100 index by over 35% over the last twelve months. On a trailing price to earnings ratio of 6 and a chunky 7.7% yield after today's 10% plunge, HBOS is cheap. Though as I've said several times before, the same applies to quite a lot of banks right now.
But with the risk of more lending shocks still out there, I'm content to watch and wait for the moment.
More: The Latest Bank Bungle | Bank Woes Continue But Barclays Hikes Payout
