Is there a glimmer of hope for HBOS shareholders at last? The bank sees the chance of a rise in its interest margins in 2009.
Last June things looked pretty rosy at HBOS
(LSE: HBOS)
. It had just celebrated its tenth anniversary as a listed company and its share price was £11, a whisker off its all-time high.
Cue the credit crunch (which of course we're obliged to mention in just about every article these days). HBOS shares have since lost over 70% of their value and are currently trading at £3 with the bank struggling to raise £4bn via a rights issue to prop up its balance sheet.
The recent fall in the shares means they are 60% below the price of 732.5p they joined the market at way back in 1997.
This morning HBOS released its latest trading statement. Banks seems to release an awful lot of these things at the moment.
The good news is that there was no more really bad news. In fact, if anything, HBOS seemed quite perky about its prospects even being as bold as to hint at a possible recovery in 2009.
The cynics would argue that of course, given its shareholders still have a month to decide whether to back its rights issue, it was hardly likely to say anything else. But there seems to be some substance to its claims.
Bad news for mortgage borrowers
Net interest margin is one of the key figures for a bank, essentially measuring the difference between the interest it pays its customers for deposits and savings and the interest it charges them on mortgages, loans and credit cards.
HBOS's net margin fell from 1.72% to 1.63% last year but the bank is forecasting a smaller drop in 2008 before this figure stabilises and possibly improves in 2009. This means that the bank reckons it will be successful in passing the burden of pretty much all the extra interest it has to pay onto us. Oh dear.
HBOS said it's seeing stable conditions in unsecured lending (i.e. credit cards and loans) but mortgage arrears have risen quite sharply in recent months albeit remaining within its forecast range. Total arrears have increased from 1.67% at the end of last year to 1.89% with arrears on self-certified mortgages nudging a worrying 4%.
Even after this rise, total arrears are less than there were in 2005 when they exceeded 2%. But they are way above the industry average (1.1% at the end of last year) and the 1.1% level HBOS itself recorded back in 2002 and 2003. HBOS has a surprisingly high 13% of its mortgage book in self-certified loans and a further 13% in buy-to-let, so its arrears figures will continue to come under close scrutiny. Recent rises in the cost of fuel and food haven't had time to impact on these numbers yet.
When it comes to house prices, HBOS has revised its prediction for this year from a mid single-digit fall to a drop of 9%. Given that it reckons prices fell 6.6% in the first five months of this year, this implies only a small drop for the remainder of the year. Make of that what you will.
Good growth elsewhere
HBOS has seen good growth in savings deposits and in its insurance and investment division. It's worth reminding ourselves just how dominant it is in the retail sector. With 20% and 16% of the mortgage and savings market respectively it is the largest player in these products.
Through its merger with Bank of Scotland, corporate banking is now an important contributor to group profits, almost equal to its retail business. Here HBOS sees the current turmoil as being limited to a few sectors so far, and it was keen to distance itself from ‘volume led' house builders, pointing out that its lending is mainly to more specialist areas of this market such as retirement homes.
In terms of write downs for its money market investments there was a small increase from £970m to £1,028m, suggesting no major nasties have been uncovered since the last trading update at the end of April.
Valuation
So on to valuation.
Prior to this statement forecast earnings and dividends per share were around 60p and 24p respectively. This represents a 40%+ fall for earnings from last year and a 50% drop in the dividend (although HBOS has already said its interim dividend will be paid in shares rather than in cash). There is a massive range in these forecasts though, with dividend predictions ranging from 14p to 30p.
Assuming no revisions to these forecasts are made in the wake of today's statement, the shares are trading on a price earnings ratio of 5 times and a dividend yield of 8%.
Although bank shares aren't really my thing these are tempting numbers, provided you believe them. It will be a bumpy ride but I suspect there is a good chance they will be trading a fair bit higher in three years time.
More: The End Is Nigh...
You could buy shares in HBOS via The Motley Fool Share Dealing Service. Our commission is only £10 a trade.
