April 29 (Bloomberg) -- HBOS Plc, the U.K.'s biggest mortgage lender, will sell 4 billion pounds ($8 billion) of shares to bolster capital depleted by asset writedowns and a deteriorating housing market.

Chief Executive Officer Andy Hornby said today he expects home prices to fall in both 2008 and 2009 by less than 10 percent and is ``planning for a more challenging environment ahead.'' HBOS wrote down an additional 2.8 billion pounds on mortgage-related losses and will reduce its dividend this year, the Edinburgh-based bank said in a statement.

HBOS faces rising defaults as U.K. house prices fall at the fastest rate since the recession of the 1990s. Its share offer comes a week after Royal Bank of Scotland Group Plc, Britain's second-biggest bank, said it will sell 12 billion pounds of stock because of the credit-market crunch. The seizure has halted sales of mortgage-backed securities, which funded more than half of HBOS loans, and Hornby predicted the market won't reopen this year.

``The important thing here is the signaling element,'' said Mamoun Tazi, a London-based bank analyst at MF Global Securities Ltd. ``The situation may get worse in the U.K.,'' said Tazi, who has a ``neutral'' rating on HBOS shares.

HBOS, Britain's second-worst performing bank stock this year, fell 1.8 percent to 486.75 pence in London, valuing the company at 18.2 billion pounds. The shares are down 34 percent this year, more than any other U.K. bank except Bradford & Bingley Plc, Britain's biggest lender to landlords.

`A lot of Money'

``It looks as though investors will be putting up a lot of money and the likelihood is that profitability won't improve in the short term,'' said Julian Chillingworth, chief investment officer at London-based Rathbone Brothers Plc, who helps manage about $21 billion including HBOS stock.

HBOS plans to offer two new shares for every five outstanding at 275 pence apiece. The bank will boost its Tier 1 ratio, a measure of capital strength, to between 6 percent and 7 percent to achieve a ``step change'' in reserves by year end.

Hornby told analysts that regulators put ``no pressure at all'' on HBOS to boost capital.

``The rights issue is not at all a good deal for investors,'' David Broadley, an investor from Glasgow, said at the bank's annual investors' meeting. ``It is pouring good money after bad.''

The bank, which owns Halifax and Bank of Scotland, has cut back on mortgage lending amid higher inter-bank lending costs and a seizure in the credit markets. Falling house prices would require the bank, which has a 20 percent share in U.K. home lending, to shore up capital under new regulations, Credit Suisse said in a note to investors this month.

`Very Weak'

The bank, forecasting assets will grow less than 10 percent this year, will keep a ``tight'' control on costs, Hornby said in an interview. The company, unlike RBS, doesn't plan to sell assets, he said.

``We see a subdued first half of the year, giving way to a much stronger second half,'' Hornby said at the shareholder meeting. The corporate lending unit will try to take advantage of ``fair-weather competitors leaving the field.''

HBOS revenue may shrink this year, said Alex Potter, an analyst at Collins Stewart in London. ``Cost cuts will help, but the outlook is very weak,'' said Potter, who has a ``sell'' rating on the shares.

HBOS's second-half profit fell 8.9 percent to 1.93 billion pounds, it said in February. The bank wrote down 227 million- pounds for that period related to asset-backed securities and lowered the valuation of debt securities by 509 million pounds.

The world's largest financial institutions have posted $312 billion of writedowns and losses related to the collapse of the U.S. subprime mortgage market last year. That has forced them to raise a total of $217 billion in new capital.

Edinburgh-based RBS announced its share-sale plans after writing down 5.9 billion pound of assets. Barclays Plc's Chairman Marcus Agius said a share sale is an ``option'' for the bank.

Monoline Risk

HBOS's writedowns so far this year exceed last year's total. The bank wrote down asset-backed securities of about 970 million pounds in its trading book and 1.87 billion pounds in its banking book, which doesn't affect regulatory capital or profits, it said.

Some of HBOS credit risks are related to bond insurers that might not be able to make good on guarantees. The bank's ``nominal exposure'' was 2.8 billion pounds on credit default swaps and 2.3 billion pounds on wrapped bonds. The bank has written down assets backed by so-called ``monoline'' insurers by 180 million pounds on a pretax basis, it said. HBOS said the writedowns will probably reverse over time.

This year's performance will be worse than last year because of higher funding costs and lower revenues from corporate investments, HBOS said today. Corporate-banking profit this year will fall to 2006 levels, it said earlier this month.

Overseas Expansion

Margins will ``stabilize or even increase in 2009,'' Hornby said. The company will continue to ``target our overseas expansion plans,'' he said.

The dividend payout ratio has been lowered to 40 percent of earnings from 46 percent before, the company said. HBOS raised its dividend when it reported 2007 results in February.

``We are planning for a more challenging environment ahead, and the proceeds of the rights issue should ensure that we benefit from strong ratios even if the macroeconomic environment deteriorates further,'' Hornby said. ``In the long term we remain optimistic about the fundamental prospects for our core businesses.''

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net; Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

Last Updated: April 29, 2008 11:45 EDT