UK Mortgage Lender Took Hit

HBOS PLC, the United Kingdom's largest mortgage lender, expects to further mark down the value of assets in the first quarter, after taking relatively small write-downs last year, Chief Financial Officer Mike Ellis said. Mr. Ellis said that fair-value adjustments on the assets are to be expected, "given the further and significant deterioration in financial markets since the year end," although he added that the bank expects to reverse the negative adjustments over time. He made the comments at a Morgan Stanley banking conference in London. The performance of HBOS, which owns the Halifax brand and has one-fifth of the U.K. mortgage market, and its ability to extend loans to customers is closely watched by economists, analysts and industry participants, as it is considered a reflection of the general condition of the housing market. HSBC Holdings PLC said this week that its First Direct subsidiary in the U.K. has withdrawn mortgages for new customers, though it expected the suspension to be temporary. Last year, HBOS made a negative fair-value adjustment of £227 million ($448.6 million) on assets that it held on its trading book. The adjustment was made according to what the assets would have been worth if sold in the market on the valuation date. HBOS had a total £34.3 billion in debt securities on its trading book at the end of 2007, of which £13.7 billion was asset-backed securities. In addition, the bank in 2007 recorded a value reduction of £509 million on the total £46.9 billion in debt securities held on the banking book. HBOS doesn't plan to sell these assets but will hold them until they mature. A negative fair-value adjustment on the banking book won't affect net profit but will reduce the total shareholders' equity. According to the group's annual report, subprime assets make up £20 million of the total £9.51 billion in U.S. residential-mortgage-backed securities held by the bank.