Almost £1.5 billion was wiped from the stock market value of HBOS yesterday after it admitted that an attempt to treat existing customers better had backfired.

HBOS, Britain’s most widely held company, revealed that its share of the new mortgage market had collapsed in the past few months as the terms it offered prospective new mortgage customers failed to match the competition. Shares in HBOS, which is owned by 2.2 million small shareholders, were the worst performing in the FTSE 100, falling by 39p or 3.6 per cent, to £10.31.

“Parts of the strategy did not deliver what we’d hoped for,” said communications director Shane O’Riordain. “We’ve learnt some lessons. We’ve already taken remedial action and told the City.”

The problem began last July when HBOS decided to narrow the differential between the terms it offers existing customers coming to the end of lock-in periods on mortgages and the terms offered to attract new customers.

BACKGROUND

• HBOS drops £1.5bn on mortgage mistake

• Halifax shock as UK new mortgage business plunges

• HBOS hikes SVR, hits borrowers

• Shares in HBOS drop nearly 5% on cautious outlook

• HBOS cautious as bad debts hit £1.7bn

HBOS must be more measured

The bank insists that it moved promptly to reverse its lending practices when it saw that new lending was falling

Related Internet Links

• HBOS company information

• HBOS share price chart

• HBOS forecast

Not enough existing customers remained with HBOS to offset the revenues forgone from fewer new customers being recruited. The group’s share of net new mortgage lending shrank from 17 per cent in 2006 to 8 per cent in the first few months of this year. In the past its share has been as high as 31 per cent and is typically about 20 per cent.

The problem was exacerbated because a few lenders including Barclays and Lloyds TSB’s Cheltenham & Gloucester aggressively sought to win market share by offering exceptional terms.

However, Ray Boulger of mortgage advisers John Charcol, said that HBOS’s problems were partly self-inflicted because it did not offer generous enough terms overall.

“The concept was good, but initially they didn’t get the pricing right,” he said, adding that neither the terms for existing borrowers nor for new ones were competitive.

Both HBOS and Nationwide Building Society have in the past attempted to reward customer loyalty with only mixed success because of the steep decline in new business.

HBOS said its decision to offer incentives to financial advisers, known as “procuration fees”, when existing HBOS customers stayed with them had worked well, and had saved £5 billion of home loan business that would have been lost.

HBOS said that it had now reverted to more tactical pricing, offering enticing deals for short periods of time. It was confident that its market share had recovered to the 15-20 per cent range.

Mr Boulger said: “The only way they are going to get back to 15-20 per cent is if they offer some very aggressive pricing, which will force competitors to follow, which is good news for borrowers.”

HBOS also warned shareholders that, like other banks, it was being affected by increasing numbers of account-holders demanding refunds on unauthorised overdraft fees.

The company said that it still expected to meet market expectations of a 10 per cent increase in underlying profits this year to £4.15 billion.

Of interest

— First-time buyers and other homeowners are now facing the highest mortgage interest payments for 15 years as the Bank of England’s four rate rises since last August hit borrowers hard

— First-time buyers, already struggling to get a foot on the property ladder thanks to soaring house prices, are now paying almost a fifth of their income in mortgage interest costs, the Council of Mortgage Lenders (CML) reports this morning

— A survey by the CML revealed that the average household buying a first home is handing over some 18.7 per cent of income to cover mortgage interest. This is the highest level since 1992, and sharply up from 16.3 per cent last year

— Those moving home and remortgaging are slightly better off, but still face the steepest interest bills for a decade and a half. Movers are paying an average 16.3 per cent of income to cover mortgage interest