Jeff Cross

Lloyds Buys HBOS: Good Deal or Bad?

The leverage ratios presented in the article are not comparable to US accounting. They include all off balance sheet financing, which US firms do not if (as is the case for LYG) they do not include residual risk for the firms. Taking out the on balance sheet securitizations for LYG (which do include some counter party risk, which, I understand, the UK government has now quietly assumed for both banks if the deal closes - this may not be the actual fact, it's not officially disclosed) and making a few other comparability adjustments the LYG tangible leverage ratio is about 12 to 1 (similar to JPM on the same basis). I don't know what the US comparable ratio is for HBOS (LN) but it's a lot less than 37. We should also note that on a common shareholder tangible equity basis the exchange ratio works out to LYG paying 39 cents on the dollar for HBOS's tangible equity (this is based on equating LYG and HBOS tangible equity). We should contrast this 0.39 ratio to banks normally trading at 2 to 5 times tangible common equity (though we see a number of banks trading below 1.0 today in the US). It might also be worth noting that both these banks were profitable in the first half even after write downs and mark to market charges, unlike the bulk of US banks.