business

By Simon Kennedy

The global banking giant (UK:HSBA: news , chart , profile ) (HBC:
27.76, -7.04,
-20.2%) will raise the cash to both strengthen its capital ratios and allow it to make limited acquisitions in the event opportunities arise. It's also lowered its dividend payout after reporting a 70% drop in net profit for 2008 and said it's withdrawing from some of its U.S. lending operations. See full story.
But at the same time, the deficit in HSBC's available-for-sale reserves has soared to more than 21 billion pounds from about 7 billion pounds at the end of June.
Assets that are classified as available for sale are those that aren't held for immediate trading purposes, but also aren't expected to be held for the asset's entire lifetime.
In that way, the bank doesn't have to record a drop in the market price as a loss unless the asset is sold or the drop in value is deemed to be permanent.
"The key question around the stock will remain, despite the capital increase, whether the balance sheet is strong enough to get the bank through a difficult 2009," said Deutsche Bank analyst Jason Napier.
Previous analysis by Deutsche Bank suggests HSBC's capital ratios could potentially fall as much as three percentage points in 2009 due to impairments on bad loans and other risky assets.
At Keefe, Bruyette & Woods, analysts said the current deficit in the available-for-sale accounting line is equivalent to 1.9 percentage points of the existing capital ratios.
"We welcome the rights issue, but the increase in the [available-for-sale] reserve means that it will not put the capital debate to rest in our view," said KBW's Mark Phin.
Not all analysts were so negative. Celent analyst Cubillas Ding said that HSBC seems to have taken a quite conservative line with its reserves, and the intention of its announcements on Monday seems to be to help it draw a line under U.S. losses.
Douglas Flint, HSBC's finance director, said the bank's own stress tests indicate a possible risk in the range of $2 billion to $2.5 billion over the next two to three years and a "likely ultimate expected loss" of about a third of that figure.
Fearful of deeper losses
Separately, activist investment firm Knight Vinke Asset Management said HSBC could face a further $34 billion of losses if it were to write down to fair value all the subprime assets it holds.
Knight Vinke has been lobbying HSBC to shutter the U.S. lending operations -- the former Household International and Beneficial businesses -- since September 2007, potentially by just walking away and putting them in receivership. HSBC bought Household in 2003.
The possibility of further losses appears to be rising because of the deteriorating economy in the U.S., the asset manager said. It also called for assurances that the $17.7 billion being raised in the rights issue won't go to Household's lenders, saying they have no contractual legal recourse to HSBC.

source :Marketwatch

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