Will HSBC, the 'big elephant', dance again?

A customer walks in to the HSBC Bank Media City branch in Dubai (CRAIG SCARR)

Faced with a multi-billion dollar cash call, HSBC investors are torn between the bank's relative strength and the headwinds still ravaging global financial companies.

HSBC, dubbed the "big elephant" in Hong Kong because of its mammoth market capitalisation and powerful share market performance, has shed $37 billion in market value since last Monday when it outlined plans to raise $17.7 billion in a deeply discounted rights issue.

While the rights issue will enhance the bank's capital ratio by 150 basis points and raise its tier 1 ratio to 9.8 percent, restoring its capital advantage over most rivals, the spectre of further writedowns in the bank's US and European businesses has made investors wary.

HSBC's Hong Kong-listed shares plunged 24 percent on Monday alone as large investors shorted the stock on hopes of buying it back after the rights issue.

HOUSEHOLD PROBLEMS HAUNT

Despite the selldown, the stock is still seen as expensive by some, with its estimated 2009 price to book ratio at 0.8 times, compared with 0.6 times for Standard Chartered, another UK-based lender with a focus on emerging markets.

"With no improvement in the news and data we have been getting, the outlook on the U.S. is an important determinant for an HSBC buy or sell," said Winson Fong, fund manager who helps manage $2 billion with SG Asset Management.

After making a loss of $16.5 billion on its US business in 2008, compared with $1.1 billion a year ago, HSBC said it would shut most of its US consumer lending business.

But worries persist over its $62 billion in outstanding loans at its HSBC Finance arm in the United States at the end of the fourth quarter and rising provisions in the bank's UK business.

"Fundamentally we are concerned from the top down these (US and UK) economies are still worsening and those two economies account for 75 percent of the loan base," said CLSA's Daniel Tabbush.

Tabbush, who predicted HSBC's massive cash call, slashed his target price on the stock to HK$28 last week after cutting his earnings estimates for 2010 and 2011 by $2 billion to $3 billion.

Dora Hui, an office assistant in Hong Kong who sold her shares in HSBC a few years ago and has been waiting to buy the stock since it dropped below HK$100, said she is not on board this time around.

"They say HSBC is not the same old HSBC anymore ... and with Citibank <C.N> shares below $1 now, could this be the way HSBC is headed?," she said.

STILL BEST OF THE PACK

But HSBC, unlike many other global lenders, turned a profit in 2008 and some company watchers said its newly bolstered balance sheet will equip the bank to acquire new businesses as other competitors pull back.

"The downsizing of the business in HFC (Household Finance Company) is a positive move," said Lee Shau Kee, an influential Hong Kong tycoon whose Shau Kee Financial Enterprises is a sub-underwriter on the HSBC rights issue for up to HK$2.34 billion.

"HSBC has a strong financial base ... the subscription price of approximately HK$28 per share is very cheap," the Hong Kong billionaire, who is also the chairman of Henderson Land Development, said in a statement on Monday.

The bank's focus on more resilient emerging markets including China and a strong influx of deposits stands it in good stead, said analysts.

HSBC is expected to slash its 2009 dividend by half after having reduced its 2008 payout by 29 per cent, but given the bank's strong capital position and liquidity there seems little reason not to expect the dividend to start growing again by 2010, Citigroup argued in a note.

Also, the bank's estimated 2009 dividend yield of 6.5 per cent looks even more attractive as the financial maelstrom rages on, the Citigroup note said.

"It's all about investor appetites. If you are a long-term investor, if you can hold the stock for three to five years, there a high chance of economic recovery all over the world and I expect the share price to rebound," said Steven Chan, banking analyst at Daiwa.

 

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