Lloyds' HBOS deal backlash builds

[Joanne98]

LONDON (Reuters) - A backlash against Lloyds Banking Group's takeover of HBOS built on Monday as its profit warning stoked fears it may need more state funds or be fully nationalised, sending its shares down over 20 percent at one stage.

Lloyds shares stabilised after the initial sell-off, however, encouraged by government comments that it does not want to take a bigger stake, and by 2:50 p.m. Lloyds shares were flat at 61.4 pence. They had fallen as low as 48p to extend their one-third tumble after Friday's profit warning.

Lloyds said then that HBOS, which it only bought last month, would make a pretax loss of 10 billion pounds, higher than expected due to a jump in losses on corporate loans at the tail end of last year.

It raised concern that problems at HBOS had infected Lloyds, which had avoided most credit crisis pitfalls, and put pressure on the enlarged bank's capital position, especially with more hefty losses expected this year.

"Losses from the HBOS book are not surprising and we expect them to push the combined group into a loss for 2009," analysts at UBS said in a note. "If losses were to accelerate, there is a risk capital could reduce to levels below which the market would have confidence in the group."

The government owns 43 percent of the bank and may need to inject more funds and take a majority, or be considering a full nationalisation, dealers and analysts said.

Tom Rayner, analyst at Citi, estimated Lloyds will make a cumulative 2008-2010 loss of 14 billion pounds and may need to raise 11.2 billion pounds of equity to keep capital topped up.

Stephen Timms, Treasury minister, told BBC radio the government was "not contemplating" injecting more capital into the bank at present, but would do what it takes to maintain market stability. Continued...

http://uk.reuters.com/article/topNews/idUKTRE51F16Y20090216