Writedowns to hit HBOS as house market worsens

By Clara Ferreira-Marques

LONDON (Reuters) - British bank HBOS HBOS.L confirmed on Thursday it was trading in line with expectations, but warned higher writedowns would hit first-half performance, as a sharper fall in house prices puts pressure on bad debts.

However, Britain's biggest mortgage lender said it was passing on more of its higher funding costs through better pricing on new lending, and forecast a slower decline in margins than in 2007, before margins stabilize or improve next year.

Shares in the bank, however, fell more than 4 percent in early trade, hit by the worsening economic outlook and volatility ahead of a planned rights issue. At 3:45 a.m. EDT the stock was down 3.8 percent at 306.5 pence, underperforming a virtually flat FTSE .FTSE blue-chip index.

Concerns over a planned 4 billion pound ($7.8 billion) cash call battered HBOS shares last week, with the bank forced to issue a reassuring statement to the market just days after a rival bank announced plans to slash the price of its own rights issue.

But Chief Executive Andy Hornby said on Thursday that HBOS was on track and brushed off worries of market "indigestion" from a surfeit of rights issues as banks ask their shareholders for cash to bolster their balance sheets.

"We're underwritten, and this rights issue is going ahead. It's as simple as that. We are not for turning," Hornby said.

"Strong capital ratios are going to be essential for the next three to four years, and banks with strong capital ratios are going to have a competitive advantage," he told Reuters.

HBOS expects its core tier 1 ratio, already better than UK rivals before the cash call, to rise to 6 to 7 percent.