LLOYDS Banking Group stunned the City by warning of £10bn in annual losses for struggling Halifax Bank of Scotland.
The announcement by Lloyds, which rescued HBOS at the height of the financial turmoil last autumn, sent shockwaves through the financial markets and hammered its share price.
The taxpayer, which owns 43% of the bank, was left with paper losses of more than £2.5bn at one stage yesterday as Lloyds’ shares tumbled up to 40% within minutes of the announcement.
Lloyds said HBOS assets had been hit by falling markets. It announced £7bn of write-downs at HBOS’s corporate division – about £1.6bn higher than expected last November.
This follows a “more conservative” assessment of HBOS’s corporate division, which is heavily exposed to the hard-hit housing and commercial property sectors.
The new of massive losses at HBOS throws a fresh spotlight on the handling of risk at the bank.
This week Sir James Crosby, a former HBOS chief executive, resigned as deputy chairman of the Financial Services Authority over claims that he sacked a head of risk for warning the bank was “going too fast”. Sir James denies the allegations.
Lloyds Banking Group chief executive Eric Daniels said the losses “primarily reflect the application of a more conservative recognition of risk and the further deterioration in the economic environment”.
Market confidence in HBOS collapsed last autumn and the Government waived competition rules to allow the bank to be taken over by Lloyds TSB.
The taxpayer has pumped a total of £17bn into the two banks to shore up their balance sheets.
Despite the latest figures, Mr Daniels said the group had a capital position “significantly in excess” of its regulatory requirements.
He said Lloyds TSB will make pre-tax profits of about £1.3bn for 2008.