S&P release on HBOS

(The following statement was released by the rating agency)

June 19 - Standard & Poor's Ratings Services said today it revised its outlook on U.K. financial services group HBOS PLC HBOS.L to negative from stable. In addition, the 'AA-/A-1+' long- and short-term counterparty credit ratings were affirmed. At the same time, the outlooks on HBOS' subsidiaries Bank of Scotland PLC, Clerical Medical Investment Group Ltd., Bank of Western Australia Ltd., and BOS International (Australia) Ltd. were also revised to negative from stable. The ratings and outlook on 60%-owned subsidiary St. James's Place U.K. PLC (A-/Positive/--) were unaffected.

"The outlook revision follows the completion of our review of the ratings on U.K. banks and building societies. HBOS derives 85% of its core earnings from the U.K., where the slowing economy is likely to pressure its revenues and impairment losses for the foreseeable future," said Standard & Poor's credit analyst Richard Barnes. "The affirmation of the ratings reflects HBOS' strong domestic franchise and our expectation that it will maintain solid earnings and capital ratios through the economic downturn," he added.

HBOS' earnings will decline in 2008 due to three factors: higher write-downs on treasury assets, lower gains from the corporate division's investment portfolio, and rising impairment losses. Profitability should remain reasonably robust, however, due to better pricing on new lending, tight cost management, and stable performances from the insurance businesses. The benefit of wider asset spreads will be offset in 2008 by higher funding costs, but should drive a stable or increasing net interest margin in 2009-2010 as more loans re-price. This is an important mitigant to the higher impairment losses that we expect in those years.

The negative outlook reflects pressure on HBOS' impairment losses and revenues arising from the slowing U.K. economy and property market. HBOS has taken sensible steps to prepare for a less favourable environment, including the GBP4 billion rights issue, slowdown in asset growth, and even greater focus on cost control.

"Our central expectations are that its earnings will be relatively robust, helped by wider asset spreads, and the rights issue will ensure that its capital ratios remain satisfactory according to our measures," said Mr. Barnes. The ratings could be lowered if credit losses increase sharply. We will pay close attention to the performance of the corporate lending, corporate investment, and specialist residential mortgage portfolios, which we view as the most vulnerable to prolonged weakness in the U.K. economy and property markets. A return to a stable outlook is not likely during 2008 given the uncertain times ahead, but it could occur thereafter if HBOS demonstrates resilient asset quality and superior risk-adjusted earnings through the current downturn.

Ratings information is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. It can also be found on Standard & Poor's public Web site at www.standardandpoors.com; select your preferred country or region, then Ratings in the left navigation bar, followed by Credit Ratings Search. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office Hotline (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4017. Members of the media may also contact the European Press Office via e-mail on: media_europe@standardandpoors.com.

(New York Ratings Team)