'From the Goldman's brokers note published last week:
HBOS continues to fund but its profile is becoming more short term
While Bradford & Bingley and Alliance and Leicester are smaller and have put in place funding vehicles to enable them to fund during 2008, HBOS needs to fund £164.1bn of maturing wholesale funding in 2008. This has been an area of concern for the stock especially with the term markets (securitisation, covered bond and EMTN) effectively being shut. We continue to believe that HBOS is able to readily secure funding as it has access not only to many funding sources across many geographies but also has access to the US Federal Reserve, ECB and Australian Central bank windows, however the shares are likely to remain susceptible to liquidity concerns. This concern is likely to ease if the BOE puts in place a liquidity environment more closely comparable to both the ECB and US Fed. Recent commentary suggests that the BOE is giving this more consideration than previously but nothing has yet been finalized. We note the following regarding HBOS’ current funding:
• HBOS has £25.8 bn of term funding due to mature in 2008 – splitting out the wholesale funding due to mature in 2008, we estimate that £25.8 bn is term funding, which is slightly tilted towards 4Q in terms of maturity but overall is fairly even.
• HBOS has raised £5.6 bn of public funding during 1Q08 – we estimate that HBOS has raised £5.6 bn public funding in 2008 so far. Excluding the £750 mn of non-equity Tier 1 raised, 80% of the funding raised has a term longer than 12 months and over 85% is LIBOR linked. This total funding raised broadly replaces the £5.4 bn that we estimate was due to mature in 1Q08.
• Bank deposits (£31.6 bn) and non-retail deposits (£26.7 bn) account for nearly 40% of funding – we do not believe that HBOS should have any trouble rolling either of these. The first is obviously dependent on LIBOR, while the second is likely to be higher cost as banks compete for the excess liquidity in the system from non-retail customers.
• Certificates of deposit (£63.1 bn) and commercial paper (£16.9 bn) account for nearly 50% of funding – the areas of greatest dependence for HBOS in terms of wholesale funding over the next 12 months are actually commercial paper and in particular certificates of deposit. Both of these are likely to remain dependent on sentiment but in view of HBOS’ diverse funding platform we do not believe it should have trouble rolling either of these. Pricing of both of these is linked to LIBOR.
• Funding is all LIBOR linked and costs are increasing – while we believe HBOS is able to roll its funding, the cost continues to increase as it is all linked to LIBOR and spreads have begun to widen: HBOS’ new funding is being replaced on average at a 20 bp spread to LIBOR. We estimate that HBOS is likely to be hit by costs of at least £140 mn during 2008.
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So just why should HBOS be granted up to 164 Billion pounds central bank funding when Northern Rock was nationalised for daring to borrow 25 Billion pounds, 10 Billion pounds plus of which was directly as a result of the Bank of England initially refusing to lend to it, thus causing the bank run??!! As a Northern Rock shareholder this stinks of hypocrisy.
HBOS continues to fund but its profile is becoming more short term
While Bradford & Bingley and Alliance and Leicester are smaller and have put in place funding vehicles to enable them to fund during 2008, HBOS needs to fund £164.1bn of maturing wholesale funding in 2008. This has been an area of concern for the stock especially with the term markets (securitisation, covered bond and EMTN) effectively being shut. We continue to believe that HBOS is able to readily secure funding as it has access not only to many funding sources across many geographies but also has access to the US Federal Reserve, ECB and Australian Central bank windows, however the shares are likely to remain susceptible to liquidity concerns. This concern is likely to ease if the BOE puts in place a liquidity environment more closely comparable to both the ECB and US Fed. Recent commentary suggests that the BOE is giving this more consideration than previously but nothing has yet been finalized. We note the following regarding HBOS’ current funding:
• HBOS has £25.8 bn of term funding due to mature in 2008 – splitting out the wholesale funding due to mature in 2008, we estimate that £25.8 bn is term funding, which is slightly tilted towards 4Q in terms of maturity but overall is fairly even.
• HBOS has raised £5.6 bn of public funding during 1Q08 – we estimate that HBOS has raised £5.6 bn public funding in 2008 so far. Excluding the £750 mn of non-equity Tier 1 raised, 80% of the funding raised has a term longer than 12 months and over 85% is LIBOR linked. This total funding raised broadly replaces the £5.4 bn that we estimate was due to mature in 1Q08.
• Bank deposits (£31.6 bn) and non-retail deposits (£26.7 bn) account for nearly 40% of funding – we do not believe that HBOS should have any trouble rolling either of these. The first is obviously dependent on LIBOR, while the second is likely to be higher cost as banks compete for the excess liquidity in the system from non-retail customers.
• Certificates of deposit (£63.1 bn) and commercial paper (£16.9 bn) account for nearly 50% of funding – the areas of greatest dependence for HBOS in terms of wholesale funding over the next 12 months are actually commercial paper and in particular certificates of deposit. Both of these are likely to remain dependent on sentiment but in view of HBOS’ diverse funding platform we do not believe it should have trouble rolling either of these. Pricing of both of these is linked to LIBOR.
• Funding is all LIBOR linked and costs are increasing – while we believe HBOS is able to roll its funding, the cost continues to increase as it is all linked to LIBOR and spreads have begun to widen: HBOS’ new funding is being replaced on average at a 20 bp spread to LIBOR. We estimate that HBOS is likely to be hit by costs of at least £140 mn during 2008.
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So just why should HBOS be granted up to 164 Billion pounds central bank funding when Northern Rock was nationalised for daring to borrow 25 Billion pounds, 10 Billion pounds plus of which was directly as a result of the Bank of England initially refusing to lend to it, thus causing the bank run??!! As a Northern Rock shareholder this stinks of hypocrisy.
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