HBOS shares fall on UK mortgages drop, deal worry

LONDON (Reuters) - Shares in HBOS Plc HBOS.L fell over 10 percent on Tuesday, with analysts saying another plunge in UK mortgage lending added to concerns that a takeover by Lloyds TSB (LLOY.L) will not solve its funding problem and slowing growth.

By 0915 GMT the share price was down 11.5 percent at 185 pence. Lloyds shares fell 7.1 percent to 255.5p, valuing its offer at 212p per HBOS share.

HBOS, Britain's biggest home lender, agreed to an all-share takeover by Lloyds last week. Lloyds is offering 0.83 of its shares for each HBOS share.

UK mortgage approvals for house purchases fell to a record low in August, down 64 percent on a year ago, highlighting continued strains in the housing sector. [nLN60967]

Analysts said there was also an outside risk that shareholders reject the Lloyds offer, which needs 75 percent approval, and worries were increasing that the U.S. bail-out plan for its banks may run into trouble.

There was already concern that the takeover will shift worries about HBOS's funding to the enlarged bank.

"The risk has been transferred, it hasn't gone away," said Mike Trippitt, analyst at Oriel Securities, who cut his rating on Lloyds to "hold from "buy" last week after the deal.

The prospect of big cost savings was positive for Lloyds in the medium term but in the short term it faced the risk of more writedowns and over-reliance on wholesale funding, he said.

Alex Potter, analyst at Collins Stewart, said in a note: "If funding markets normalise, this business could look marginally cheap. If they remain frozen well into 2009 'new Lloyds' could react a lot like 'old HBOS'."

(Reporting by Steve Slater and Simon Falush)