Business - UK banks Lloyds,HBOS in merger talks

LONDON: British bank Lloyds TSB is in merger talks with domestic rival HBOS Plc to create a 28 billion pound ($50 billion) mortgage giant, a person familiar with the matter said on Wednesday.

News of the talks surfaced after shares in HBOS, Britain's biggest home lender, were battered for a sixth consecutive day amid mounting fears about its funding position.

A deal would mark another chapter in a dramatic shake-up of the global financial landscape as firms with weaker balance sheets or funding strains are swallowed by stronger rivals.

The source declined to provide details on the stage or details of the talks.

Lloyds and HBOS declined to comment.

The BBC said the two banks were in advanced talks and a deal could be finalized as early as Thursday. Under the deal HBOS shares would be valued at nearer to last week's closing price of 300 pence than their current level, it said.

By 5:50 a.m. EDT HBOS shares were up 2 percent at 186.4 pence, valuing the bank at 10 billion pounds ($17.9 billion), having slumped more than 50 percent earlier to an all-time low of 88p.

Lloyds shares were up 13 percent at 317p, valuing it at almost 18 billion pounds.

A deal could be attractive for Lloyds as it could cut costs, increase market shares and lift margins to offset the prospect of higher bad debts as the economy worsens, but this would depend on the terms of any deal, analysts said.

The talks are being encouraged by both the Treasury and UK regulator the Financial Services Authority, the BBC said.

HBOS has come under mounting pressure as it is more reliant on wholesale markets to fund its business than other UK banks, and the cost of borrowing funds in the interbank market continues to rise as the credit crunch has made banks reluctant to lend to each other.

That raised the risk that savers with HBOS could withdraw funds and create a bigger problem, analysts said.

HBOS and the FSA sought to soothe concerns about HBOS's funding position, but had limited success.

"We are satisfied that HBOS is a well capitalized bank that continues to fund its business in a satisfactory way," the Financial Services Authority said in a statement.

A spokesman for HBOS said the bank was "a strong financial institution with significant capital resources at its disposal" and it continued to fund itself in the wholesale markets.