Battered by Crisis, British Mortgage Lender HBOS Talks Merger With Lloyds

LONDON, Sept. 17 -- Britain's biggest mortgage lender, HBOS, severely bruised by the global credit crisis and facing concerns that it might collapse, was in merger talks Wednesday with Lloyds.

If the deal goes ahead -- and many analysts expected it would -- it would create a $54 billion banking giant. Together the banks have 140,000 employees, 3,000 branches and 38 million customers.

HBOS, created in 2001 by the merger of Bank of Scotland and British mortgage lender Halifax, has been subject to a sell-off that has trimmed its stock value by half in three days.

Concern over HBOS investors dumping more shares and panicked customers staging a run on the bank was so grave that Prime Minister Gordon Brown personally intervened to encourage the merger, the BBC reported Wednesday. Only a year ago, the credit crunch led to a run on British mortgage lender Northern Rock; the government seized control of the bank in February.

The London stock market dropped another 2.25 percent Wednesday, as global financial turmoil grew and a new report said that British unemployment had hit 5.5 percent, the highest rate in nine years, with 1.7 million people out of work.

Word of a possible bank merger helped HBOS reverse its slide of the past few days.

If authorities allow its merger with Lloyds, it would be a remarkable turnaround, said Mark Durling, a banking analyst with investment management firm Brewin Dolphin. The talks were part of an "unprecedented ballgame," he said, noting that in the past decade, competition authorities had worked "to prevent a superbank." In 2001, he said, Lloyds was blocked from buying Abbey National, a much smaller bank.

In spite of that, analysts thought the government would allow a merger this time around out of concern over further damage to the financial sector.

Banking stocks in general have taken a severe beating this week. "It was meltdown Monday followed by traumatic Tuesday. Today was wake-up Wednesday," Durling said. "I woke up and saw casualties on a new level of uncertainty."

Charles Goodhart, a professor of banking and finance at the London School of Economics, said that because London's international financial sector is "more connected to Wall Street" than those of other countries, it has suffered severely from the U.S. housing credit crunch and the collapse of the investment bank Lehman Brothers.

He said the merger of HBOS and Lloyds would mean that the British banking sector, dominated by a relatively small number of major banks, would have even fewer players. He saw few options for helping HBOS, saying that people would "not be comfortable" with a government bailout of HBOS, and that Lloyds, one of the least affected by the crisis, was in a strong position.

Brown, whose popularity has plummeted in polls, has been trying to stave off calls from within his own Labor Party to step aside. Even as his supporters say that the current financial crisis brewing makes it the wrong time to think about picking a new prime minister, the economic turmoil seems to be making his position more precarious.

Late Wednesday, HBOS confirmed the merger talks with Lloyds, issuing a statement that it "may or may not lead to an offer being made for HBOS."

Special correspondent Karla Adam contributed to this report.