Nov. 3 (Bloomberg) -- Lloyds TSB Group Plc plans 10 billion pounds ($16 billion) of writedowns against capital at HBOS Plc, the U.K. bank it agreed to buy in a government-backed rescue.

The markdowns come after a review of ``non-public information'' from HBOS, London-based Lloyds TSB said in a statement today. The reduction in reserves reflects assets yet to be adjusted because they are ``available for sale'' and those booked at prices above market value, Lloyds TSB said. In a separate statement, Edinburgh-based HBOS recorded writedowns that will cut nine-month profit by 5.2 billion pounds.

``It looks like HBOS has cleaned up its portfolio,'' said Simon Maughan, a London-based analyst at MF Global Securities Ltd. who has a ``buy'' rating on Lloyds TSB and a ``neutral'' rating on HBOS. ``We still think the takeover is very likely. It may mean a counter-bid is less likely.''

The HBOS takeover will produce 1.5 billion pounds in cost savings and create the U.K.'s ``leading financial-services company,'' Lloyds TSB Chief Executive Officer Eric Daniels told reporters. While the combined banks plan to sell 4 billion pounds of preferred stock to the U.K. this year, Lloyds TSB is considering ``several possible routes'' to repay the government in 2009 to end restrictions on dividend payments.

Lloyds TSB closed unchanged at 197.8 pence in London, valuing the bank at almost 12 billion pounds. HBOS rose 6.2 percent to 105.4 pence, giving it a market value of 5.7 billion pounds.

Standalone Basis

``HBOS should vote in favor of the deal because on a standalone basis, HBOS's value is lower,'' said Sandy Chen, a London-based analyst at Panmure Gordon & Co. who has ``buy'' ratings on Lloyds TSB and HBOS. He estimates HBOS on its own is worth about 2.6 billion pounds, half its current market value.

Lloyds TSB may face a rival bidder. Scottish financier Jim Spowart said he is working with a ``global financial-services company'' he declined to identify about a possible bid for HBOS.

Lloyds TSB Chairman Victor Blank told reporters today he's ``not losing sleep,'' over the possibility of a rival offer. ``We've heard nothing tangible whatsoever,'' he added.

Lloyds TSB agreed to buy HBOS in a deal valued at 6.3 billion pounds as of Oct. 31, as the government waived competition concerns and allowed a takeover creating a bank with a 28 percent share of Britain's mortgage market. The companies plan to raise 17 billion pounds by selling preferred shares and ordinary stock in a sale underwritten by the government. The U.K. will own as much as 43 percent of the combined company, to be named Lloyds Banking Group Plc, unless investors buy shares.

Less Capital

Lloyds TSB is counting on cost-savings in the takeover to reduce its need for capital. Lloyds said it will have to raise 7 billion pounds of capital should it fail to complete the buyout, 1.5 billion pounds more than required in the combination with HBOS. ``There can be no certainty that Lloyds TSB would be able to successfully raise such capital,'' it said.

Daniels said he is ``very comfortable'' with the impairments, funding and capital position of the combined company in what is a ``compelling transaction'' for shareholders.

Lloyds TSB said rising customer defaults, credit losses and worsening stock markets led to a ``substantial reduction'' in pretax profit in the first nine months of the year.

Lloyds TSB said it lowered credit writedowns this year to 270 million pounds from 384 million pounds by using new International Accounting Standards Board rules.

Lower Profit

HBOS, the U.K.'s biggest mortgage lender, said writedowns will reduce 2008 profit by 5.2 billion pounds and cut reserves by 3.8 billion pounds.

The company posted losses of 1.8 billion pounds on Treasury assets, 150 million pounds on Icelandic banks and bad-loan provisions of 1.7 billion pounds in the corporate division in the first nine months of 2008. HBOS also posted a charge of 1.2 billion pounds for bad loans in its consumer division.

Daniels named a management team for the combined bank last week that draws almost entirely on its own board. Lloyds TSB reduced its offer for the U.K.'s biggest mortgage lender on Oct. 13 to reflect ``market conditions'' and the additional 11.5 billion pounds of capital needed by HBOS, which was dependent on capital markets for funding.

Customer Withdrawals

The U.K. brokered the HBOS takeover in September after it lost about half its market value in a week. Some HBOS customers withdrew funds during the weeks before the government produced a rescue plan for the banking system, Finance Director Mike Ellis told analysts on a conference call.

Lloyds may repay the government's preference shares by raising money from investors, selling assets and agreeing to revised capital requirements from U.K. financial regulators, Daniels said. Lloyds will also pay shareholders a bonus in shares in the first half of next year, it said.

The bank is working on the assumption that insurance assets won't be sold, Archie Kane, head of Lloyds TSB's Scottish Widows insurance unit, told analysts.

Lloyds TSB shareholders will vote on the deal on Nov. 19 and HBOS investors will vote at a meeting on Dec. 12. The company will also propose increasing the basic pay for Lloyds' directors to as much as 1 million pounds and raising fees paid to directors to as much as 1 million pounds, from 750,000 pounds, the company said.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net; Ben Livesey in London blivesey@bloomberg.net

Last Updated: November 3, 2008 12:51 EST