HBOS

West LB banking analyst Neil Smith has tempered his positive take on HBOS (HBOS), slashing his price target from 589.4p to 355p and trimming his recommendation from ‘buy’ to ‘add’.

Smith bases his downgrade on the ‘material deterioration in the UK economic outlook’ and cites recently released data, including a Bank of England projection for GDP to be flat for at least the next 12 months and consensus estimates for unemployment next year stretching from 2.9% to 3.3% in the last three months.

Currently trading at 288p, HBOS, as the UK biggest mortgage lender, is more closely leveraged to the state of the domestic economy than some of its peers and Smith writes: ‘Our reductions in earnings per share estimates for 2008, 2009 and 2010 are driven primarily by higher estimated loan losses in both the retail and corporate divisions.’

Smith believes loan losses will not peak until 2010, given the difficult outlook, and he adds despite his reassessment of the lender: ‘even our reduced target price is not without risk as it is in part based on a belief that consensus may be overestimating the impact of loan losses in 2009 and 2010.’

Ominously, given the bank has just been through a very difficult rights issue in order to restore its balance sheet, Smith also says its capital ratio, while adequate for now, remains sensitive to further ‘negative fair value adjustments’.

by Tom Sieber