Published March 3, 2009

HSBC shares slump on US$18b cash call

Rights issue is deeply discounted; FY08 pre-tax profit plunges 62%

By NEIL BEHRMANN
IN LONDON

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HSBC Holdings' share price plunged yesterday, following a deeply discounted US$17.7 billion rights issue, a slide in profits and a sizeable dividend cut.

Downsizing: Besides reporting dismal results yesterday, HSBC said it would reduce its consumer lending operations in the US, shutting down its HSBC Finance Corp and Beneficial brands, causing a loss of 6,100 jobs

In intra-day trading in London, the shares collapsed 24 per cent to 373 pence from last Friday's close of 491 pence before reviving to 390 pence. Europe's biggest bank will offer 5.1 billion shares at 254 pence each, making the 5-shares-for-12 rights issue a British record.

The issue price is at a 48 per cent discount to Friday's close and compares with the bank's peak price of around 1,090 pence in late 2006. The rights issue has been expected for weeks and chief financial officer Douglas Flint disclosed that the capital infusion was necessary because of the sharp deterioration in the markets during the fourth quarter.

HSBC announced the issue when it disclosed that pre-tax profit for the year ended Dec 31, 2008 plunged 62 per cent to US$9.3 billion from US$24.2 billion.

To shield the bank from the financial and economic crisis around the globe, group CEO Michael Geoghegan said that it had 'taken measures to protect the business'. The bank has introduced more conservative lending criteria, is issuing shares to increase capital strength and is applying a conservative advances- to-deposits ratio of 84 per cent. But with HSBC's broad deposit base and relatively strong capital ratio, the bank is in a position to increase lending, he said.

The bank's Tier 1 capital ratio, a key measure of financial resilience, declined one per cent to 8.3 per cent in 2008, but the share issue will boost that to 9.8 per cent. The rights issue, which keeps HSBC free from government bailouts and intervention, implies that over the longer term, the bank will be in a position to purchase assets in Asia from distressed competitors such as Royal Bank of Scotland, analysts say.

Knight Vinke, the activist investment group and a critic of the HSBC board, is concerned, however, that the money from HSBC's rights issue will be diverted to bail out bondholders in HSBC Finance. Knight Vinke, which is backed by CalPERS (the giant California state pension system), called on HSBC to ring- fence HSBC Finance, which has an outstanding real estate loan portfolio of US$62 billion. The firm is concerned that the money will be used to repay external holders of bonds in HSBC Finance.

HSBC is also providing unspecified amounts to cover litigation surrounding safe custody of funds caught in the Bernard Madoff US$50 billion fraud.

Meanwhile, the bank's 2008 results made for gloomy reading. Excluding goodwill impairment on loss-making HSBC Finance, its US operations' pre-tax profits were US$19.9 billion, down 18 per cent. The bank said it would reduce its consumer lending operations in the US, shutting down its HSBC Finance Corp and Beneficial brands, causing a loss of 6,100 jobs. But the company said its retail bank branch business in the US would remain operational.

The loss in North America, including a goodwill impairment charge of US$10.6 billion in its personal financial services business, was US$15.5 billion.

Despite a poor final quarter, European profits were higher, the bank said.

Asia produced pre-tax profits of some US$11.9 billion, 11 per cent down from the record performance of 2007. Profits in Hong Kong declined 26 per cent to US$5.5 billion from 2007's record levels, mainly reflecting lower wealth management and insurance income in the deteriorating economic climate.

There were also write- downs on equity investments. Outside Hong Kong, the Rest of Asia-Pacific (including the Middle East), grew pre-tax profits 27 per cent to US$6.5 billion. Many individual markets performed strongly, with profits in India some 26 per cent stronger at US$666 million, and mainland China operations grew 64 per cent to US$319 million. Operations in the Middle East increased pre-tax profits by US$439 million or 34 per cent to US$1.7 billion.

Annual results, however, masked a deterioration in the second half, causing nervousness among analysts and contributing to the decline in HSBC's shares.