HBOS (UK)

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HBOS was absorbed into what is now Lloyds Banking Group in 2009. Previously, the group had liked to regard itself as the challenger to the UK's traditional high street banks, the so-called "Big Four" of HSBC, RBS, Barclays and Lloyds TSB. In reality, it was already well and truly part of the establishment. Formed in 2001 from the merger of two separate banks each strong in its own specialist area, HBOS had by 2007 risen to become the UK's #4 financial services business by assets. Halifax brought with it the UK's biggest mortgage lending portfolio, while Bank of Scotland was strong in small business lending and had dynamic trading partnerships with the likes of Sainsbury and the AA. However, the dramatic economic problems originating in the US subprime mortgage sector had a devastating effect on HBOS during 2008. These woes were exacerbated by a collection of extraordinarily risk investments in UK commercial property. Because of its reliance on increasingly hard-pressed capital markets, HBOS was soon struggling to pay its day-to-day debts, causing confidence in the bank to plunge. Following a catastrophic collapse in its share price by September 2008, HBOS agreed to be taken over by rival Lloyds TSB. That deal was completed in January 2009.

The first British building clubs were established in around 1775, but were temporary institutions, disbanded once founding club members had all built or purchased their homes. (See Abbey Group profile for history of UK Building Societies). They were replaced from around 1845 by "permanent" societies which encouraged industrial workers to continue saving a portion of their weekly wages, which was then invested in improved housing and services in what were otherwise grim and unsanitary industrial centres. The Halifax Permanent Building Society was founded in 1853 in Halifax, a fast-expanding factory town in the North of England. Its first manager was Jonas Dearnley Taylor, who ran the Society until 1903. He was succeeded by Enoch Hill, who by 1913 had established the Halifax as Britain's biggest building society.

The organisation became even bigger in 1928 when it merged with the country's #2 society, the Halifax Equitable. The resulting entity, known as the Halifax Building Society was now more than five times larger than its nearest competitor. Although other societies continued to challenge the Halifax's lead over the coming years, it retained the #1 position as a result of a series of well-chosen mergers with other smaller associations. Yet this remained a highly specialised area of finance. The country's building societies enjoyed a monopoly of the mortgage lending market, but were prohibited from offering the more wide-ranging and lucrative financial services supplied by mainstream banks.

In 1986, Margaret Thatcher's Conservative government unveiled a mammoth deregulation of the financial services industry. One major change was the lifting of regulations restricting savings, banking and insurance services to separate groups of companies. This allowed banks and insurers to offer mortgages and home loans in competition with the building societies, but also freed the societies to move into more profitable areas. Rival building society Abbey National leapt headlong into the new market, converting itself into a bank in 1989 to raise capital. However Halifax took a more cautious approach, widening its portfolio in slow increments.

In 1995, the Halifax absorbed the country's #5 society, Leeds Permanent, and acquired fund managers Clerical Medical a year later. Finally in 1997, in a bid to compete more directly with the country's mainstream banks, the Halifax abandoned its mutual status, converting into a public limited company by issuing £18bn of shares to 7.6m of its qualifying members. It used its new funds to acquire several other small financial institutions, including mutual bank Birmingham Midshires, but once again was slow to jump into a full-blown merger with a large partner. Other add-ons included a stake in financial services advisers St James Place Capital, as well as the rescue of the sales force and fund portfolio of failed mutual insurer Equitable Life.

A perfect opportunity for consolidation came in late 2000 after the highly respected Bank of Scotland [see separate profile for history] failed in its attempt to take over struggling UK high street bank NatWest. After fruitless attempts to find another partner, Bank of Scotland was wooed into a friendly takeover by Halifax in May 2001. The merger was completed in September that year, and the newly created Halifax Bank of Scotland promptly transferred its headquarters to BOS's home town of Edinburgh. Halifax CEO James Crosby was named as chief executive of the merged group. He continued to lead the company for the next five years, and was knighted in 2006. Later that year he stepped down as CEO, and was succeeded by former COO Andy Hornby, then at 38 the youngest man ever to lead a FTSE 100 company. Although Hornby proved an effective leader, his youth and comparative inexperience possibly contributed to the problems that later ensued.

Over the next two years, the group continued to develop its residential and mortgage lending business while also pushing aggressively into commercial and corporate banking. HBOS came under increasing pressure during the course of 2008 as a result of its heavy exposure to residential and commercial property in the face of a dramatic decline in values and consequently in new mortgage applications. Meanwhile an even more damaging situation was beginning to develop. HBOS's commercial banking unit had enjoyed extraordinary growth during the previous few years as a result of what was, in hindsight, extraordinarily reckless lending. In 2007, it reported operating profits of £2.3bn on income of just £3.8bn, a spectacular performance. Inevitably, it was not to last. Even as the economy soured during 2008 and other banks stopped lending, the corporate banking arm of HBOS carried on until it was clear that a full-blown crisis was in progress. As a result, the division was subsequently forced to make substantial adjustments to its portfolio over the following two years, generating huge losses. Added to this was the fact that HBOS had customarily funded its day-to-day cash requirements not from its own reserves but by tapping capital markets, which gradually shut down after the summer as a result of market fears. This raised serious concerns over the bank's ability to fund itself, and led to heavy speculation that its shares would fall. This lack of investor confidence, exacerbated by short-selling by more rapacious traders, proved catastrophic, causing a steep decline in HBOS's market valuation.

In Spring 2008, HBOS launched a £4bn rights issue to recapitalise its balance sheet, but increasing fears about the bank's prospects drove the actual share price below the offer price and left underwriters holding the majority of the shares, which they sold in the market below par. That triggered a further decline in confidence. Despite a statement by regulators that the bank was fully funded, the share price continued to fall in the wake of the turmoil of September 2008. As a result, HBOS was forced to open negotiations to sell itself to rival Lloyds TSB in order to avoid collapse. That deal was agreed over the space of 48 hours, with HBOS agreeing to be bought for an effective value of £12.2bn. The merger completed at the end of 2008. In early 2009, it was revealed that the group's head of risk between 2002 and 2004 had warned senior management that its sales-led strategy and lax lending procedures were likely to cause serious problems in the future, but his comments were ignored and he was subsequently dismissed.

The full extent of the damage inflicted by the turmoil of 2008 was clear to see in HBOS's final results for the year. Reported net income plunged from £21.3bn in 2007 to just £3.6bn because of writedowns of investments and trading losses, resulting in a pretax loss of £10.8bn for the year. In 2007, the group reported pretax profits of £5.5bn. Total assets were £690bn.

At the time of its takeover, Dennis Stevenson was group chairman and governor of the Bank of Scotland. Andy Hornby was group chief executive. Both left the group at the end of the year. Hornby later resurfaced for a short period as the new CEO of Alliance Boots. Sir James Crosby later volunteered to be stripped of his knighthood, a task that was completed in 2013.

Last full revision 30th September 2015


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