HBOS sees bad debts rise

Banking group HBOS today said it expected a "moderate" worsening in bad debts as it revealed half-year profits rose 15% to £2.26bn.

The group - formed with the merger of Halifax and Bank of Scotland in 2001 - said the number of loans customers had fallen behind on had increased to 2.22% from 2.03% at the end of last year.

But HBOS said it was encouraged by "historically low" interest rates and the fact that employment prospects remained strong.

It said: "We therefore expect only a brief period of slower economic growth and a moderate deterioration in retail credit conditions."

Unveiling profits in line with analysts' expectations, the group also said its share of the mortgage market had remained unchanged on last year at 17%.

HBOS employs about 70,000 people, with about 67,000 working in the UK.

"Overall, the economic outlook in the UK remains encouraging," the group added.

Today's results follow updates from rivals HSBC and Lloyds TSB, which have both highlighted the impact of slower consumer spending on repayments. Barclays and Royal Bank of Scotland are due to report later this week.

HBOS said it lost £753m covering problem debt in the six months to June 30, compared with £602m last time.

The expected increase in bad credit at its retail operation was partly offset by an improvement at its corporate arm.

Within the high street division, HBOS said customers opened 311,000 new bank accounts and 429,000 credit card accounts. Underlying profits rose 8% to £1bn.

HBOS chose to hold its mortgage share due to the "subdued" personal loans market, it now has a 17% share of the UK's net mortgage lending.

Its strategy of favouring higher return, specialised lending over remortgages resulted in a rise in bad secured debt to 1.84% from 1.43% at the end of 2004.

However, it said it was continuing to focus on strong asset cover for its loans, and the loan to value ratio (LTV) of new lending remained at 59%. Across its entire book 11% of secured loans have an LTV above 85%, compared with 7% at the end of 2004.

Also on the retail side, the company said claims for endowment compensation have continued to run at high levels for the first six months of the year, although the volume of claims may now have peaked. It has put an additional £130m aside to settle customer claims.

Profits in the corporate arm rose by 29% to £757m, with customer deposits growing "strongly" at a rate of 16%. There was an improvement in credit quality during the period.