Lloyds Banking Group shares tumbled over 20 per cent today as a backlash against its takeover of HBOS built after Friday's profit warning revived concerns it may need more state funds or be fully nationalised.
By 9.50am, Lloyds shares were down 4.9 per cent at 58.4 pence after falling as low as 48p. The shares fell by a third after Friday's profit warning.
Lloyds said HBOS, which it only bought last month, would make a pretax loss of £10 billion, 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 per cent of the bank and may need to inject more funds and take a majority, or be considering a full nationalisation, dealers and analysts said.
"We cannot discount the prospect of Lloyds requiring further capital if HBOS turns even worse. For the equity investor this means the bank is not cheap with a chance of major further dilution," said Alex Potter, analyst at Collins Stewart.
British finance minister Alistair Darling said on Saturday that banks were best left in the private sector, in an effort to cool speculation that Lloyds could be nationalised.
Investors were angered that the government-brokered takeover of HBOS may have been rushed, and that as recently as Wednesday Lloyds chief executive Eric Daniels gave no indication of the scale of problems at HBOS.
He said his bank would have typically put in three to five times more due diligence on the takeover if it had not been so hurried.
"They turned an investment in a stable, some say even boring, diversified bank with a high quality balance sheet, and which paid high dividends to shareholders, into a risky investment with no dividends," said Roger Lawson, communications director at the UK Shareholders Association, which represents retail investors.
HBOS's warning about rising corporate bad debts kept pressure on most other UK banks, including Royal Bank of Scotland, which, like HBOS, is exposed to the problem commercial real estate sector.
Reuters