HSBC has launched a massive capital raising from its shareholders to shore up its strength following a 70 per cent fall in profits last year. Given that it remains one of the world's most strongly capitalised banks, that says something about the impact of the financial crisis on the global banking industry. It also says a lot about HSBC's relative strength that it can turn to shareholders at a time when bank stocks have little appeal to investors and major British and American rivals have had to accept government bailouts and controls.
The US$17.7 billion rights issue at five-for-12 is priced at HK$28 a share, or a discount of more than 50 per cent to Friday's closing price. In considering it, shareholders will have to weigh poor market sentiment now and likely deteriorating conditions in the bank's markets against the prospect of future gains when the global economy recovers.
For many Hongkongers who have held HSBC shares for a long time, it would mean raising their stake in a vastly different bank from the conservatively run local institution they originally invested in - one with broad international exposure to a downturn that has left its mark. Net profit fell to US$5.7 billion last year from US$19.1 billion the year before, largely as the result of losses on consumer finance in the US subprime mortgage crisis.
HSBC is still making profits in the worst environment for financial institutions since the Great Depression. It says the rights issue will raise its Tier One capital reserves - a key indicator of a bank's financial strength - to 9.8 per cent, in excess of the target range, after they fell 1 per cent to 8.3 per cent last year. The question is whether shareholders will be persuaded that the group can put the worst of the fallout from the financial crisis behind it - that it is well-placed to ride out the financial storm and acquire good assets being sold off by rivals who have been bailed out by governments.
Last night, a number of Hong Kong tycoons pledged their support for the bank, with a few even agreeing to be an underwriter for the rights issue. Others have doubts, however, given recession in the US and Europe - a major profit contributor - and slowing down in its growth markets of Asia and South America raises a lot of uncertainty.
Before the handover, when HSBC was still identified as a Hong Kong bank, it enjoyed a lot of confidence from retail investors because it was a conservatively managed, prudent institution that rode on the back of the city's success. Slowdowns and crises came and went without the bank or its shareholders losing money in the long run.