Lloyds in advanced talks to buy HBOS

LONDON (Reuters) - Lloyds TSB is in advanced talks to buy domestic rival HBOS, HBOS said on Wednesday, to create a 28 billion pound mortgage giant.

News of the talks surfaced after shares in HBOS, Britain's biggest home loan lender, were battered for a sixth consecutive day amid mounting fears about its funding position.

A deal would mark another chapter in a dramatic shake-up of the global financial landscape as firms with weaker balance sheets or funding strains are swallowed by stronger rivals.

A brief statement from HBOS confirmed the talks but did not contain any further details. Reuters had earlier reported the two banks were in talks.

The BBC said a deal could be finalised as early as Thursday and the government would overrule any concerns about competition issues. Prime Minister Gordon Brown was involved in negotiating the deal, the state-funded broadcaster said.

A spokesman for the prime minister declined to comment on the HBOS and Lloyds talks but said: "He speaks to a very wide range of senior business and financial leaders, as you would expect.

"The chancellor made it clear yesterday that we will do whatever is appropriate to maintain the integrity of the UK financial system," he added.

Lloyds is Britain's fifth-biggest bank and HBOS is the sixth-biggest, but they rank fourth and first for mortgage lending and would have a 28 percent share of home loans.

By 1:40 p.m. HBOS shares were up 3.3 percent at 188.5 pence, valuing the bank at 10 billion pounds, having slumped more than 50 percent earlier to an all-time low of 88p.

Lloyds shares were up 11 percent at 309p, valuing it at almost 18 billion pounds.

FUNDING SQUEEZE

A deal could be attractive for Lloyds as it could cut costs, increase market shares and lift margins to offset the prospect of higher bad debts as the economy worsens, but this would depend on the terms of any deal, analysts said.

The talks are being encouraged by both the Treasury and regulator the Financial Services Authority, the BBC said.

HBOS has come under mounting pressure as it is more reliant on wholesale markets to fund its business than other UK banks, and the cost of borrowing funds in the interbank market continues to rise as the credit crunch has made banks reluctant to lend to each other.

That raised the risk that savers with HBOS could withdraw funds and create a bigger problem, analysts said.

There were no signs of a rush to withdraw on Wednesday and some HBOS customers welcomed the takeover talks.

"The (possible) takeover is good news. I'm more worried about why the government aren't doing more," said Margaret, a 37-year old housewife outside a London branch.

HBOS and the FSA sought to soothe concerns about HBOS's funding position before the news of the talks broke.

"We are satisfied that HBOS is a well capitalised bank that continues to fund its business in a satisfactory way," the FSA said.

A spokesman for HBOS said the bank was "a strong financial institution with significant capital resources at its disposal" and it continued to fund itself in the wholesale markets.

(Additional reporting by Frank Prenesti, Kate Kelland, Neal Parsons, Lorraine Turner and Olesya Dmitracova; Editing by Louise Ireland, Quentin Bryar and Erica Billingham)