Lloyds Banking unveils $12 billion HBOS loss

LONDON (Reuters) - Part-nationalized Lloyds Banking Group said its HBOS unit made a hefty loss last year due to a bigger-than-expected rise in bad loans, wiping a third off its value and raising fears more state help will be needed.

HBOS had a pretax loss of 8.5 billion pounds ($12.3 billion) for 2008, Lloyds said in a statement on Friday, driven by 7 billion pounds in bad corporate loans and a 4 billion pounds in asset writedowns.

In December, HBOS had estimated its corporate bad loans for the 11 months to November 30 at just 3.3 billion pounds.

Lloyds shares closed 32.5 percent lower at 61.4 pence, having earlier fallen as low as 54.9 pence.

"Obviously we need to digest the detail, but it looks increasingly as if Lloyds HBOS will now go into majority public ownership, followed inevitably by nationalization," said Vince Cable, finance spokesman for the opposition Liberal Democrats.

The government owns a 43 percent stake, after supplying 17 billion pounds to the enlarged group.

Lloyds said the big rise in bad loans and writedowns was driven by falling asset values as credit markets continued to deteriorate.

"The market doesn't like the fact that in a period of a month, the corporate losses (at HBOS) are twice what they had announced," said Mamoun Tazi, analyst at MF Global.

It said the increase also reflected the application of Lloyds' own more conservative accounting methods at HBOS since the two banks completed their tie up in January.

Analysts expect UK banks to suffer a sharp rise in bad debts this year as a recession that began in 2008 gathers pace.

The British economy contracted by 1.5 percent in the final quarter of 2008, official figures showed last month, and surveys have shown a steep falling-off of business activity.

"Cleary there was a big deterioration at the end of last year. If you extrapolate that run rate, then this is a business that's owned by the taxpayer in about 18 months," said Fox-Pitt, Kelton analyst Leigh Goodwin.

Speaking to British lawmakers, Lloyds Chief Executive Eric Daniels warned earlier this week that the next year or two "will be incredibly tough for our shareholders as well as our customers" but said he had found no nasty shocks since acquiring

HBOS.

Lloyds said its Lloyds TSB unit made a profit of about 1.3 billion pounds, including write-downs of 1.3 billion pounds.

The company also said the combined group had a core tier 1 capital ratio -- a key measure of capital strength -- of between 6 percent and 6.5 percent, "significantly ahead" of the regulatory minimum.

HBOS, seen as vulnerable to the global credit crisis because it depended on wholesale borrowing for much of its funding, agreed to be bought by Lloyds TSB in September last year.

The government-brokered deal came amid confidence-sapping falls in HBOS' share price, and was made possible by a one-off waiver of British competition rules.

($1=.6920 pounds)

(Editing by Simon Jessop and Karen Foster)