HBOS sets 4 billion pound rights issue

By Clara Ferreira-Marques and Steve Slater

LONDON (Reuters) - HBOS made a 4 billion pound cash call on Tuesday and said it would trim its dividends, as it grapples with an increased hit from toxic assets and a deteriorating mortgage market.

The country's biggest mortgage lender is the second major UK bank in days to turn to investors with a deeply discounted rights issue, after Royal Bank of Scotland (RBS.L) last week made a record 12 billion pound cash call. HBOS's move is expected to add to pressure on other banks to follow suit.

HBOS HBOS.L, which said it was working in challenging conditions, also followed RBS in further marking down the value of treasury assets, announcing 2.8 billion pound writedowns for the year to date, almost four times the modest hit taken for all of 2007.

The bank said the fully underwritten rights issue would bolster its balance sheet and allow it to target capital ratios at the top of the sector, preparing it for a further worsening in economic conditions, but also to grow through "defined growth opportunities" at home and abroad.

"We've taken the firm view that for the next four to five years, given the more uncertain macroeconomic environment, we want to have an even higher target ratio," Chief Executive Andy Hornby told Reuters in a telephone interview.

"We want to be well positioned for whatever macroeconomic uncertainties are thrown at us over the next few years."

The bank said UK market conditions remained "challenging" and it expected a deterioration of the credit environment in 2008, though margin decline is expected to be lower than last year.

HBOS will offer to sell two new shares for every five existing shares at 275 pence each, representing a 45 percent discount to Monday's close of 495-3/4p and a 36 percent discount to the stock's theoretical ex-rights price.