HSBC announces a sharp drop in profits; write-downs in U.S. mortgage unit expected to be cited as reason for equity call
HSBC will reveal plans for the UK's biggest-ever rights issue today as it tries to shore up its balance sheet in the wake of the banking crisis.
The equity call, which is expected to ask investors for as much as £12.6bn in a two-for-five share deal, comes as the bank announces that 2008 profits were down sharply on a year earlier.
HSBC is so far the only major UK high street bank not to seek government support—as Royal Bank of Scotland and Lloyds Banking Group have done—or to seek a large equity injection from a single existing shareholder, as in the case of Barclays.
The bank is expected to cite write-downs in its US mortgage business, which was formerly known as Household, as the main reason behind the need for the equity injection; the business could now be closed. The business has lost more than $30bn (£21bn) in the two-and-a-half years since it was bought by HSBC, or more than double the acquisition price paid by the bank.
Today's financial results will detail a £17bn provision against bad debts, as well as a goodwill write-off of £7bn. The bank could also scrap its final dividend to save £7bn, while executive bonuses are expected to be curbed. The rights issue is expected to be priced at around a 40 per cent dis-count to HSBC's existing shares, which closed at 491.25p on Friday.
The group has lost 38 per cent of its value in the last year: a decent performance compared with the UK's other major banks. Sources close to HSBC insist that the rights issue was being done from a position of strength. In September, the bank reported that its tier-one capital ratio stood at 8.9 per cent, the upper end of its 7.5 per cent to 9 per cent range. The further deterioration in the global banking system, brought on by the collapse of Lehman Brothers, and state rescues of RBS and HBOS, have put pressure on these ratios. It has persuaded HSBC's management, led by its chairman Stephen Green and chief executive Michael Geoghegan, that a cash call was necessary.
Analysts expect that the capital ratio figure will rise to 10.5 per cent after the rights issue, making HSBC one of the best capitalised banks not to have received a taxpayer bailout. The exact terms of the rights issue are yet to be ironed out, with the final details withheld from today's announcement, giving the bank more time to speak to key shareholders.
It is thought that the bank's biggest investors were told of the plans on Friday, with further discussions held over the weekend. Goldman Sachs and JP Morgan Cazenove, as well as HSBC, have been mandated by the bank to underwrite the cash call.
A spokesman for Knight Vinke, the activist shareholder group that has been calling on HSBC to address the losses at its US mortgage division, said yesterday that it would wait to see the details of the proposed rights issue before making specific comments. It added that it "welcomed that at last the bank has acknowledged the scale of the problem". In January, Knight Vinke said it was "convinced a substantial rights issue is inevitable and the longer HSBC leaves it the worse the problem will become".
Despite the need for greater capital strength, and unlike many other UK financial services groups, HSBC is expected to announce that 2008 was a profitable year for the bank. Its broker Panmure Gordon says the final profit number will be about half the level achieved in 2007, however.
The performance is in stark contrast to some of the UK's other major banks. Both RBS and HBOS (now owned by Lloyds) relied on huge taxpayer bailouts, and both are now partly state-owned. RBS said last week that it had lost £24bn, a UK corporate record, while Lloyds said that HBOS lost £10bn in 2008.
HSBC's record rights issue will surpass that of RBS, which last April announced plans to raise £12bn from its shareholders. The move ultimately proved ineffective, with the Government coming to that bank's rescue in October. HSBC considers that its operations, particularly in Asia and the Middle East, have helped protect it from the worst of the financial crisis.