Cheap Loans Without Consideration of Adverse Credit

HSBC May Seek To Raise $14 Billion Capital, CLSA Says

Tuesday, 16 December, 2008

HSBC Holdings Plc, Europe’s biggest bank, may seek to raise about $14 billion as increasing bad credit loans provisions erode profit, CLSA Asia-Pacific Markets said.

The bank may raise funds through a share placement or a rights offering, CLSA analysts led by Bangkok-based Daniel Tabbush said in a note to clients today. They cut CLSA’s share price target for HSBC by 30 percent to HK$64, citing the risk that rising loan defaults in the U.K. and U.S. will hurt earnings.

HSBC will have to make more provisions next year because 75 percent of its loans are in the U.S. and U.K. to customers who largely have too much debt, the report said. New York state manufacturing contracted in December at the fastest pace on record, while U.K. house prices extended declines this month.

“We downgrade to assume a worse cycle and in light of the major de-rating of banks with similar or even less exposure to U.S. sub prime lending,” CLSA said in the report.

David Hall, a Hong Kong-based spokesman at HSBC, declined to comment on the report when contacted today.

CLSA also cited HSBC’s failure to sell its headquarters in London for an expected $2 billion gain, together with the bank’s announcement yesterday that it lent $1 billion to clients who invested funds with the brokerage of Bernard Madoff, accused by regulators of using his investment advisory business to run a $50 billion Ponzi scheme.

HSBC said yesterday it has $1 billion at risk after providing financing to funds that invested with Madoff, whose New York-based money-management firm collapsed last week. The bank also has clients in its “global custody business,” who have invested with Madoff, HSBC said in a statement yesterday.

Loan Defaults

HSBC, which hasn’t needed U.K. government assistance to boost its capital, cut 500 jobs in Asia last month, citing deteriorating economic conditions. It also fired 1,100 workers in its global banking and markets division in September, amid the worst financial crisis since the Great Depression.

“Every bank that’s raised capital has said its capital position is fine,” said Tabbush by telephone today. “The regulators will probably require higher levels of capital and lower levels of leverage and HSBC will face the same issue.”

The bank said on Nov. 10 that third-quarter profit rose even as it set aside a more-than-estimated $4.3 billion to cover bad loans in the U.S. and forecast “further deterioration.”

The U.S. unit “declined markedly” because of consumer and corporate loan defaults, said the bank. Pretax profit in the quarter was helped by lending in Asia, $3.4 billion in accounting gains on its debt and the sale of assets in France.

The bank has set aside $42.3 billion for bad loans across the company since the start of 2006.

Tabbush kept his “sell” rating on HSBC, saying the outlook would remain gloomy because of the economic slowdown. The stock traded down 0.5 percent at HK$84.80 by 10:39 a.m. in Hong Kong, taking this year’s decline to 36 percent.

Source: http://www.bloomberg.com/