HSBC shares drop 5.5pc on reform fears

PUBLISHED : Tuesday, 13 September, 2011, 12:00am
UPDATED : Tuesday, 13 September, 2011, 12:00am


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HSBC Holdings shares fell 5.54 per cent to HK$61.35 yesterday - plumbing depths not seen since July 2009 - on fears its profits will be drained by new British banking reforms requiring lenders to set aside vast amounts of cash to absorb future losses.

But the bank remains likely to increase its dividend payout for the next two years at least, analysts said following their initial reading of a report by Britain's Independent Commission on Banking, which was published yesterday.

By 2019, British banks must set aside up to 20 per cent of their risk-weighted assets to absorb losses from future banking crises, the commission said.

This new loss absorber will be added on top of the lenders' existing safety cushion which is called 'core tier-one capital'.

The banks must also separate their high street banking operations from trading and investment banking by the deadline.

Evolution Securities' Ian Gordon, who is one of the City of London's most bearish HSBC analysts, said: 'I do not expect HSBC to cut its dividend in response to the reforms.'

While analysts have not had much time to digest the report, Gordon said he still forecast the lender would increase its annual dividend payment by 10 to 11 per cent for the this financial year and next year.

Gordon has a 'sell' rating on HSBC because he believes that the shares are expensive compared with British peers.

The commission has also ruled that, from 2019, banks' core tier-one capital must be at least 10 per cent of risk-weighted assets.

HSBC's core tier-one ratio already stands at more than 11 per cent.

Gordon said there was a chance the reforms would be watered down by 2019, by which time the recent credit crisis would be a distant memory.

If not, he said, HSBC was likely to make adequate profits to save up for the new rainy day fund without cutting its dividend or issuing fresh shares.

Politicians have portrayed the banking reforms as payback for the excessive risk taken by the lenders that led to successive government bailouts of the industry during the credit crisis.

Britain fully nationalised mortgage lender Northern Rock in 2007. It also holds 83 per cent and 41 per cent of high street lenders Royal Bank of Scotland Group and Lloyds Banking Group, respectively.

The coalition government has promised to clamp down on what politicians and anti-bank campaigners call 'casino capitalism', in other words using depositors' cash for hedge fund-style activities such as trading.

Business Secretary Vince Cable, writing in the Daily Mail newspaper yesterday, said British banks now 'will not be able to use the deposits of British savers to play the banking equivalent of the roulette wheel and the taxpayer will no longer stand behind that side of their business'.




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