Shares in banking group HBOS plunged nearly 7% yesterday after it conceded it now expects a significantly bigger fall in house prices than it did in late April and flagged rising bad debts in its mortgage and corporate loan books.

Shares in banking group HBOS plunged nearly 7% yesterday after it conceded it now expects a significantly bigger fall in house prices than it did in late April and flagged rising bad debts in its mortgage and corporate loan books.

The 22p tumble in the shares of the Halifax and Bank of Scotland parent to 296.75p took them back down towards the 275p price of its £4bn rights issue. They plunged below 275p on Wednesday last week before staging a rebound, aided by Financial Services Authority action on speculative short-selling.

However, HBOS chief executive Andy Hornby yesterday hammered home his belief that the underwriting of the rights issue was "rock solid" and it would go ahead.

Appearing at pains to contrast HBOS's position with Bradford & Bingley, which had to abandon its initial rights issue plans and restructure its capital-raising, Hornby told The Herald: "We have just come out with a statement. We are able to say we are trading satisfactorily, delivering a resilient performance, bang in line with our expectations. There is absolutely no question we are fully underwritten. The rights issue is proceeding as planned."

It emerged yesterday that the expenses of the rights issue, which is underwritten by Morgan Stanley and Dresdner Bank, will come to about £160m. This amounts to about 4% of the amount being raised, but an HBOS spokesman noted the expenses reflected partly the fact that the bank had the largest number of private investors of any UK company, with more than two million such shareholders.

HBOS declared in its trading update yesterday: "The rate of cost growth is expected to decline in 2008. HBOS is committed to exercising tight cost control and managing its cost base in the context of the changing business environment."

Asked in this context whether there were now any plans for significant job cuts at HBOS, Hornby appeared to highlight the possibility of reductions in some parts of the business. However, he seemed to signal that a hefty cut across the group was not under consideration.

Hornby told The Herald: "If you look at...the words we put in the statement: we expect cost growth will be lower this year than last year. We are still talking about cost growth in total."

Noting that parts of the HBOS business would be growing and other parts downsizing, he added: "We are still talking about overall cost growth in 2008." In its commentary on its corporate business, built from the Bank of Scotland side of the merger which formed HBOS in 2001, the bank noted: "The cost base continues to be reviewed in recognition of the slower business environment. "

Asked if this signalled there might be further shrinkage of the workforce in corporate, on top of job cuts already announced in this division, Hornby replied: "(In) all parts of our business, we consistently look at what to grow or what to shrink. Cost control is tight everywhere."

Pressed on industry talk that HBOS might dispose of its Bank of Western Australia subsidiary, Hornby refused pointedly to rule this out but signalled the emphasis in terms of capital-raising was on the rights issue.

Hornby said: "You are never going to find a CEO stupid enough to completely rule out anything. I am never going to say I am ruling out a disposal of any sort. The international business is performing well. We are particularly pleased with the performance of BankWest.

"We are going through a rights issue. At this stage, we have decided to raise capital by (way) of a rights issue. The idea that we need to raise capital by disposals is not on the agenda at the moment."

HBOS said yesterday that it now expected UK house prices to fall "by up to 9%" this year.

Asked in the context of HBOS's April forecast whether things had become worse quickly in the housing market, and whether there was further trouble to come, Hornby replied: "I think 9% is a pretty realistic forecast. Most people are forecasting lower than that (a lesser fall). I don't think that is realistic, given house price deflation in the last three months."

On whether HBOS might seek a strategic investor or partner, a strategy adopted by rival Barclays, HBOS said: "We think the rights issue is the right way for us to have gone. It is a tough call but I am convinced, in two years' time, people will look back and say it is the right thing to have done."

There has been much talk in the City about HBOS's exposure to housebuilders, retail, and commercial property, with the bank having done big high-profile deals in all three sectors.

HBOS revealed yesterday that it had written down its previous £200m equity exposure to housebuilders by £100m. However, referring to its loans to housebuilders, it said "debt safety is underpinned by collateral values including landbanks".

Seemingly at pains to demonstrate HBOS was not as exposed to the housebuilding sector as some City talk was suggesting, Hornby said: "It is only 3% of our corporate book. That means it is under 1% of our total group book."

HBOS said advances to the UK property sector in total represented "some 38% of the corporate portfolio as at the end of May 2008". Hotels, restaurants, and wholesale and retail trade together account for 11%.

Asked if last week's fall in HBOS shares below 275p had given him pause for thought, Hornby replied: "My job is always to worry about everything. What I have got to do is make sure the market understood our trading position. That is what I have done."

Hornby was at pains to emphasise the importance of HBOS's comment yesterday that "the group is achieving substantially better pricing on new lending and we expect good growth in net interest income in 2008".

He said: "That is a real positive. That is what underpins strong cash flow for a bank in tough times."

Hornby added: "Retail (bank) margins are likely to fully stabilise this year and improve next year. Corporate margins take a bit longer to stabilise. The overall expectation is for greater stability this year, ie a much smaller reduction in margin (than in 2007), followed by an ... improvement in 2009."

HBOS said impaired loans in its mortgage book rose from £4.23bn in December to £4.95bn at end-May, or from 1.8% to 2.09% of balances.

Referring to its corporate business, it said: "Whilst evidence of corporate difficulty is limited to specific sectors, our plans anticipate a continued softening in the economic climate, resulting in higher impairment charges. In a slower growth environment, we have also planned for lower returns from our corporate investment portfolio."

HBOS raised its credit crisis-related writedowns in its treasury trading book, reflected through its income statement, by £58m to £1.028bn. But it reduced the post-tax writedowns in its treasury banking book, taken through equity, by £49m to £1.825bn.

Standard & Poor's yesterday revised its outlook on HBOS from "stable" to "negative", citing UK economic slowdown. But it affirmed its financial strength ratings for HBOS, citing the bank's strong domestic franchise and an expectation it will maintain solid earnings and capital ratios.

Hornby predicted the Bank of England would hold UK base rates at 5% "for a while".