Morgan Stanley scaled back its estimate of HSBC Holdings' funding need by as much as 26 per cent yesterday, about one month after its initial report sparked a selldown on the stock. In a rare move, Morgan Stanley issued a report saying it had revised down the capital requirement at HSBC to between US$20 billion and US$35 billion, after 'extended analysis of the group's capital position'. In a report issued in mid-January, the US brokerage had an estimate of between US$27 billion and US$42 billion and a target price of HK$52, sending the stock into four consecutive days of losses. Morgan Stanley yesterday said it realised the US$5.8 billion capital shortfall for HSBC's Hong Kong subsidiary operation could be satisfied by the parent group through conversion of preference shares into equity. Another US$1 billion capital need could be saved by adjusting dividend distributions at the lender's subsidiaries, it added. Despite the revised estimate, Morgan Stanley keeps its 'underweight' rating and HK$52 target price on the stock. The target was considered by observers as the main reason for the stock to slump to a 10-year low of HK$55 on January 21. Shares of HSBC slid 2.54 per cent to HK$57.50 yesterday, extending this year's decline to 21.98 per cent. 'Over the past few weeks, we have become incrementally more bearish on the outlook for profits,' said Morgan Stanley analysts Anil Agarwal and Daniel Shum. 'In the past 20 years, HSBC has never faced a global recession. We expect a combination of loan losses and risk assets to put more pressure on HSBC in 2009 and 2010.' It estimated HSBC had injected US$10 billion of equity into its subsidiaries last year, leaving little surplus capital at a time when investors are calling for a stronger capital cushion. Meanwhile, CLSA yesterday slashed the target price of HSBC to HK$41, the lowest among all leading brokerages, on concerns of mounting bad debt at its British operations. 'Operationally, British banks are showing tremendous [non-performing loan] growth and this will be new for HSBC when it reports on March 2,' CLSA said in a report. 'We are lowering our price target on HSBC to one more in line with United States and British banks, where it has 62 per cent of its loans.' The European brokerage said HSBC might have to raise as much as US$14 billion, which could be achieved by a one-for-four rights issue at a 35 per cent discount. HSBC, which derives more than 75 per cent of its profit from emerging markets, is under intense scrutiny for not having fund-raising plans while its rivals have already raised capital to brace for the impact of recession in many countries. Standard Chartered announced in November a HK$20.98 billion rights issue to boost its capital base. In December, Bank of China Hong Kong (Holdings) said it would get a US$2.5 billion loan from its parent company to bolster capital following a profit warning for the first time since it listed in Hong Kong in 2002.