In the midst of the current credit crunch HBOS’ shares have fallen to the lowest point in their eleven-year history having lost over 60% of their original value and are currently trading at £3 with the bank struggling to raise £4bn via a rights issue.

Despite the forecasted drop in house prices and sales the bank hinted towards a possible recovery in its fortunes in 2009, though this has been questioned as merely a tactic to appease nervous shareholders ahead of the rights issue.

"This rights issue is fully under written and it's proceeding on track," chief executive Andy Hornby said. "These are difficult markets. We are determined to carry on delivering,"

The lender, which sells approximately 1 in 5 of every mortgage loan in the UK, has admitted that this would likely take a downturn and expects only “modest growth” this year.

This is tempered for the bank by its prediction that the net interest margin would stabilise by next year. As Fool.co.uk explains:

“Net interest margin is one of the key figures for a bank, essentially measuring the difference between the interest it pays its customers for deposits and savings and the interest it charges them on mortgages, loans and credit cards.”

For the consumer this translates into the burden being transferred on to them through fees and interest charges. Even though HBOS is lending less, it was making more profit on each deal and said it expected to keep doing so into next year.

This comes in the wake of the latest borrowing figures from the Council of Mortgage Lenders, which showed a 19% drop in total lending this year. HBOS’ new prediction of a 9% drop in house prices over the year would mean only a modest decline for the rest of the year, which has seen a drop of 6.6% in the first 5 months. Even these revised predictions look at this point in time somewhat optimistic if current trends remain the same.

HBOS also said that the growth of the business outside its lending division would be "significantly" lower than in 2007, owing to lower revenues from its corporate investment portfolio.

The bank said that its insurance business is performing well, with strong sales in home and car insurance and fewer extreme weather events than in 2007. Earlier this year, it posted lower than expected underlying pre-tax profits for 2007 of £5.71 billion. Its bad debt charges last year rose 18 per cent to £1.29 billion.

Another point of concern for the bank was its links to other industries including construction, which are also suffering through the credit crunch. This was dismissed though by HBOS who explained that it was keen to “distance itself from ‘volume led' house builders, pointing out that it’s lending is mainly to more specialist areas of this market such as retirement homes”

The current decline in the housing market is causing problems not just for the banks but also for consumers and the record declines show no sign of slowing down. As Bloomberg reports:

“U.K. housing starts will probably sink to the lowest since World War II ended, the Construction Products Association said this week. The Royal Institution of Chartered Surveyors said earlier this month the decline in home prices reported by its members is the most widespread since it began its surveys in 1978.”

Which is bad news for all concerned about the value of their homes and their ability to pay back mortgages. Darrell has more articles on mortgages as well as other finance related articles.