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HBOS's massive u-turn

• Robert Peston
• 29 Apr 08, 09:09 AM

is, as expected, raising of new shares. But the total amount it is raising from issuing shares is about 拢600m more than that, because it is also proposing to pay its first half dividend in shares.

It is also conserving precious capital in a further way by reducing the proportion of its earnings that it pays out in dividends from 46% to 40%.

This reduction in the dividend-payout ratio is the starkest example of how HBOS, like most big banks, was deluded last year about the fundamental strength of financial markets.

What now seems astonishing - and reckless - was that on August 1 2007, just days before what most of us see as the official start of the credit crunch, HBOS actually announced an increase its dividend-payout ratio from 41% of earnings to 46%.

Less than nine months ago, HBOS swaggered: "It is clear that HBOS has a strong capital generation capacity, as a natural consequence of returns on equity running above 20%, increased capital generation from our Investment businesses, and the benefits to be derived from the move to Basel ll [the new international regime for measuring the robustness of banks' balance sheets]".

That statement looks absurd today, as it nails to the floor every last penny it can find.

So the one thing that is perhaps lacking from today's rights-issue statement from the bank is a statement from management, led by the chief executive, , about how they got it so wrong last year - and what lessons have been learned to prevent those errors being repeated.

In business, as in life, there is much to be said for owning up to mistakes and taking steps to avoid repeating them.

That said, HBOS wasn't alone. More or less all banks made the same misjudgement - as did the , the City watchdog, that allowed the likes of HBOS (and, infamously, Northern Rock too) to hand out more and more cash to shareholders at the tail end of an unsustainable bull market.

However, in view of the uncertainties ahead, it is probably judicious for HBOS to have performed this sharp u-turn. And, just like 's 拢12bn rights issue, HBOS's decision to massively strengthen its balance sheet by raising equity-capital shines a very bright spotlight on the reluctance of to do the same.

Barclays has weaker capital ratios than HBOS. The economic and financial risks that lie ahead are no less for it than they are for Royal Bank and HBOS. Investors in general plainly have an appetite for new shares issued by banks. The and the FSA both want all banks to strengthen their balance sheets.

So it is slightly odd that Barclays has sent out a strong signal that it has no urgent need for new capital. The humiliation for its management would probably be greater if there were a further downturn in credit markets and it was forced to ask shareholders for significant financial help some months after this opportune moment.

That said, Barclays has become something of a maverick player over the past few years. And its judgements have turned out pretty well. So maybe Barclays is right and maybe it's HBOS that's too fearful of the icebergs that may lie ahead.

In that context, it is striking that HBOS is not forecasting a meltdown in the economy. Its statement says it expects GDP growth of between 1.25% and 1.5%, fairly strong employment prospects, low interest rates and mid-single-digit falls in house prices this year and next.

That's not a disaster scenario. But, because of the instability of global financial markets, there is a meaningful risk that the out-turn could be a lot worse.

Which is why HBOS has decided to reinforce its hull against the risk of hitting an iceberg. And if you are a shareholder or customer, you will probably sleep easier knowing that the hull is that much stronger.

UPDATE 09:26: The , the chairman of Alliance & Leicester, is a serious loss to the City and the wider business community.

He was the rock of Warburg's corporate finance department in the 1980s, when Warburg was Europe's most toweringly successful investment bank (those were the days).

Latterly he performed a valuable public service in modernising the rules that govern the composition of boards - and took on this difficult role at the behest of the Treasury when most business people lacked the gumption to attempt to reconcile the clashing interests of shareholders, management and ministers.

I've known him for 25 years, in my evolution from cub reporter to boring old fart. We had one of our regular lunches only a month ago - when, as usual, he spoke the kind of commonsense that is a foreign language to a younger generation of bankers.

I'll miss him, as I'm sure will his many current and past colleagues.

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