Lloyds TSB agrees £15bn rescue of lender HBOS

MERGER TALKS:LLOYDS TSB last night agreed a £15 billion rescue of HBOS, owner of Bank of Scotland (Ireland) and Irish retail bank Halifax, as shares in the UK's largest mortgage lender plummeted amid fears that the global financial turmoil could claim its biggest British victim

The Financial Services Authority, the UK banking regulator, contacted several banks, including HSBC, on Tuesday afternoon to see whether they would be willing to buy HBOS after this week's sharp fall in its shares.

The British government is thought to have been encouraging a market solution to help the bank, which is critical to the financial system, as it accounts for one-fifth of all UK mortgages and is the UK's largest savings institution.

A spokesman for Bank of Scotland (Ireland) declined to comment. Details of the merger between Lloyds TSB and HBOS are due to be announced this morning.

Bank of Scotland (Ireland) and Halifax had a loan book of €32.4 billion at the end of June, and is a significant player in the mortgage, property development and commercial lending market in Ireland. The bank reported profits of €124 million in the six months to June.

The bank employs 1,700 staff in the Republic, while Lloyds TSB operates a small commercial lender with just eight employees.

HBOS was regarded as too large to fail, but in recent days its share price slid dramatically amid fears about its reliance on wholesale funding.

The British government was forced to nationalise Northern Rock this year and is at pains to prevent a further loss of confidence among retail savers.

The deal with Lloyds TSB will create the UK's biggest retail bank, with a combined mortgage book of £335.1 billion (€424 billion) and a deposit base representing about half of the UK savings market.

It may lead to thousands of job losses as the two banks employ a combined 139,000 staff and have 3,100 branches. Analysts estimate that one-third of costs could be cut from the new bank.

Lloyds could offer about 280p per share for HBOS, giving the bank a market valuation of about £15 billion. HBOS shares fell 20 per cent to close at 147p.

Jeremy Heywood, chief of staff to UK prime minister Gordon Brown, is thought to have been involved in talks with Lloyds.

The UK government could help smooth competition issues as the new bank would hold about 28 per cent of the UK mortgage market, about one-third of current accounts, 25 per cent of business banking, and would be the UK's biggest life assurer.

People with knowledge of the talks suggested Lloyds was concerned about HBOS's exposure to commercial property, which accounts for one-third of its corporate loan book, and suggested the bank could push the British government for some guarantees.

Lloyds TSB's planned takeover of HBOS would be railroaded through using a government override of rules aimed at preventing anti-competitive deals, Whitehall officials said yesterday.

-(Additional reporting, Financial Times service)