Page last updated at 23:15 GMT, Friday, 21 August 2009 00:15 UK

Pace of HBOS decline 'unexpected'


Lloyds chairman: HBOS bad loans were no surprise

The pace of the decline at HBOS surprised Lloyds, Sir Victor Blank, the banking group's chairman told the BBC.

The government backed a Lloyds takeover of HBOS last September, bypassing normal competition rules to avoid the collapse of the Halifax owner.

Sir Victor, who will step down by June 2010, said the group had expected there would be HBOS losses, but they came in at "the worst end of expectations".

"What surprised us was the speed at which these losses came in," he said.

The Lloyds Banking Group, which is 43% owned by the Treasury, revealed in February this year that HBOS, which it absorbed in January, had made a pre-tax loss of £10.8bn in 2008.

Meanwhile, 2008 profits at Lloyds TSB - as it was called - also fell, by 80% to £807m. The two banks together are expected to be in loss this year.

Sir Victor, who has faced criticism for the decision to buy HBOS, said that the mood following the losses was in stark contrast to that when the deal was first done.

Rules changed

"When we announced the deal in the middle of September, it did not feel like a rescue of HBOS," said Sir Victor.

"It felt like a wonderful opportunity that was available and would only have been available in adversity," he told the BBC's business editor Robert Peston.

If there's a lesson to be learnt out of this crisis, it is that you've got to have liquidity in the system and you've got to make sure that you've got that liquidity
Sir Victor Blank

But the world changed, when in the middle of October 2008, the government required all the banks to have extra capital.

"The government changed the rules and the world changed," said Sir Victor.

"What we found in the HBOS portfolio was I think the problems we anticipated being there. The speed with which those problems came home to roost was greater than we would have anticipated because [of] the fall in GDP, " he said.

He added that the economic slide was "way beyond the expectations of the chancellor of the exchequer or Warren Buffett or you or me".

Changes at top

Sir Victor announced in May that he would step aside as chairman, a decision he accepts as necessary.

"It became clear that in order to rehabilitate Lloyds Banking Group as quickly as possible in the eyes of the banking community, it was probably necessary for some change to be made at the top. Fair or unfair... it was necessary."

Banks, such as HBOS, which looked to the wholesale markets to raise money, thought these funds would never dry up, he added.

"If there's a lesson to be learnt out of this crisis, it is that you've got to have liquidity in the system and you've got to make sure that you've got that liquidity," he said.

The full interview with Sir Victor Blank can be seen on Leading Questions with Robert Peston at 2230 BST on the BBC News Channel or watch it now by clicking here

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