Published March 3, 2009

breakingviews.com
HSBC shores up its defences

By JOHN FOLEY
Email this article
Print article
Feedback

IT'S not how it looks, honest. HSBC announced a shock US$17.7 billion rights issue yesterday, saying the move was partly designed to help it make opportunistic acquisitions. The reality is that this is a highly defensive equity raising.

The cash call comes just over a month after analysts at Morgan Stanley questioned whether HSBC's capital ratios were all they seemed. Whatever the merits of the analysis, it has weighed heavily on the bank's shares.

But the rights issue should now put HSBC's financial health beyond reasonable doubt. Its core Tier 1 ratio will reach 8.5 per cent, giving HSBC about US$16.5 billion of room for further writedowns before falling below the 7 per cent that investors nowadays seem to see as a minimum.

HSBC clearly needs the extra buffer, much of which could be absorbed by fresh losses. True, it is calling a halt to most new business in Household Finance, the US mortgage lender acquired in 2002 to take HSBC into sub-prime lending.

But rising unemployment and slowing growth continue to put pressure on what would remain of its US lending.



Meanwhile, HSBC's Asian growth engine, which accounts for 60 per cent of pre-tax profits, is starting to creak too. Buried in the full-year results, loan impairment rates in Hong Kong increased more than tenfold year on year, albeit the numbers remain small. Dwindling trade flows and low interest rates, two prevailing headwinds in Asia, will further dampen profits.

Even if HSBC didn't face these issues, it had good reason to tap shareholders. HSBC is no longer the only safe bank in town. Rivals' balance sheets have been rebuilt - often with state help - and deposits have been guaranteed by governments in regions including the UK and Hong Kong.

Without a rights issue to maintain its relative capital advantage, HSBC risked seeing an end to the flood of depositor and private wealth money it has enjoyed in recent months.

How much of the new capital can HSBC really deem available for acquisitions? Being among those few banks that have stayed above water unaided may give HSBC an edge when it comes to buying up emerging market assets. Bailed-out western rivals will be under pressure to invest at home first. But expect most of HSBC's new billions to stay squarely on the balance sheet.