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HBOS' trading update provided new disclosures on the breakdown of the
retail and commercial property loan books. Buy-to-let and Other
commercial grew faster than we'd expected in 2008. Credit quality in
the retail specialist loans has deteriorated more rapidly than we'd
expected. We expect the mainstream portfolio will follow. We've cut
our 2009E EPS by 11% and target price by 8%. Despite the low
valuation, we remain cautious as we see HBOS as most exposed of the
large caps to a UK property downturn. Hold.
* Travel and arrive
HBOS' relatively sharp sell-off today (-7%) seems to suggest that the
UK banks may sell-off both on the expectation of weakening credit
quality and once again on its confirmation.
Although we view HBOS as a relatively cheap share (we examine P/PPP
multiples in particular in this piece), with 70% of group loans to
residential and commercial mortgage customers, we see the balance
sheet as poorly positioned for weakening markets in the UK, Ireland
and Australia.
* The wrong-shaped loan book
New disclosures presented today allowed us to back out loan growth
from the sub-sets of the property book where we were surprised to see
buy-to-let loans up 14% in 2008 while the mainstream book shrunk;
commercial property and construction lending is up 11% YTD despite an
environment which necessitated a 100m write-down of HBOS' equity
stakes in property companies. Arrears are rising across the book, but
fastest in the specialty loan portfolio; we expect the mainstream
residential mortgage portfolio will continue to deteriorate.
* Cheap but likely to remain so; risks
We have cut our 2009 EPS forecasts by 11% and reduced our target price
- derived using the sum-of-the-parts calculation shown in Figure 3-to
415p from 450p beforehand. The key upside risks are a sustained UK
equity market rally, a rapid falling of the yield curve, a stronger
environment for private equity realizations and lower margin
compression. The key downside risk is a greater than expected
deterioration in UK credit quality.
retail and commercial property loan books. Buy-to-let and Other
commercial grew faster than we'd expected in 2008. Credit quality in
the retail specialist loans has deteriorated more rapidly than we'd
expected. We expect the mainstream portfolio will follow. We've cut
our 2009E EPS by 11% and target price by 8%. Despite the low
valuation, we remain cautious as we see HBOS as most exposed of the
large caps to a UK property downturn. Hold.
* Travel and arrive
HBOS' relatively sharp sell-off today (-7%) seems to suggest that the
UK banks may sell-off both on the expectation of weakening credit
quality and once again on its confirmation.
Although we view HBOS as a relatively cheap share (we examine P/PPP
multiples in particular in this piece), with 70% of group loans to
residential and commercial mortgage customers, we see the balance
sheet as poorly positioned for weakening markets in the UK, Ireland
and Australia.
* The wrong-shaped loan book
New disclosures presented today allowed us to back out loan growth
from the sub-sets of the property book where we were surprised to see
buy-to-let loans up 14% in 2008 while the mainstream book shrunk;
commercial property and construction lending is up 11% YTD despite an
environment which necessitated a 100m write-down of HBOS' equity
stakes in property companies. Arrears are rising across the book, but
fastest in the specialty loan portfolio; we expect the mainstream
residential mortgage portfolio will continue to deteriorate.
* Cheap but likely to remain so; risks
We have cut our 2009 EPS forecasts by 11% and reduced our target price
- derived using the sum-of-the-parts calculation shown in Figure 3-to
415p from 450p beforehand. The key upside risks are a sustained UK
equity market rally, a rapid falling of the yield curve, a stronger
environment for private equity realizations and lower margin
compression. The key downside risk is a greater than expected
deterioration in UK credit quality.
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