Cash call welcomed but HSBC still slumps
Many industry experts welcomed HSBC's unprecedented rights issue but with no end to the bad news in sight, banking stocks are the main culprits once again
HSBC announced Monday that is has decided to launch a capital increase to the tune of £12.5 billion following a very turbulent final quarter in 2008 and amid an ongoing economic slowdown. Analysts largely welcomed the move but the news still had a dilutive effect on the shares, which traded down 12% at 432p mid-morning.
Fellow British banks Royal Bank of Scotland, Barclays and Lloyds Banking Group were all between 3% and 6% weaker, and in conjunction with the main blue-chip casualty HSBC helped to drag the FTSE 100 index over 3.5% lower. At 10.30am, London’s leading index was off 137.45 points at 3,692.64.
HSBC said its rights issue, which is to be the largest ever launched, will not only improve its capital position in what is expected to be a difficult 2009 but will also provide the bank with funds to take advantage of acquisition opportunities should they arise as other banks focus on their domestic markets during the global downtown. The 5-for-12 rights issue will be launched at 254p per share, a heavy discount of almost 50% to Friday’s closing price.
The group also said it has decided to wind down its US consumer finance business, Household, resulting in a goodwill write-down of US$10.6 billion and the loss of up to 6,000 jobs. The write-down was the main culprit of the bank’s 70% drop in net profit in 2008 to US$5.73 billion and would have played a part in management’s decision to reduce the full-year dividend payment to US$0.64 per share from US$0.89 in the previous year. Excluding the write-down, the group’s pretax profit was US$19.9 billion for the year—broadly in line with the market’s expectations.
HSBC’s cash call has enabled the bank to raise the top end of its target Tier 1 capital ratio to 10% from 9% previously and will strengthen its core equity Tier 1 ratio to 8.5% and its Tier 1ratio to 9.8% on a pro forma basis as at end-December 2008.
“Even without the rights issue capital ratios look healthy,” Evolution Securities analyst Bruce Packard said, “with Tier 1 ratio of 8.3% and core Tier 1 ratio of 6.8% [for] full-year 2008.”
Packard calculates that the 5-for-12 rights issue is 30% dilutive on an EPS basis and 10% dilutive on a tangible book-per-share basis.
The issue will be the largest on record that has not been underwritten by the Government. Goldman Sachs and JP Morgan have underwritten the capital raising, which is subject to shareholder approval.
Although many welcomed the call, confidence in the banking sector remains extremely brittle, particularly as HSBC is widely considered to be better placed than most banks and today’s confirmation of the rights issue has acted to remove any hope that the flow of negative news is coming to a close.
Until the market sees sure signs of an end to the bad news, equity markets, with financials at the core, are likely to continue to feel the pressure, experts believe.
