LONDON (Reuters) – HSBC launched Britain’s biggest rights issue on Monday, to raise 12.85 billion pounds ($18.3 billion) to help it overcome big losses in the United States and exploit the woes of weaker rivals.
Europe’s biggest bank said it would shut most of its U.S. consumer lending business, cutting 6,100 jobs, but that it was ready for acquisitions in its traditional stronghold of Asia where many banks are pulling out to focus on their core markets.
HSBC said it would sell 5.1 billion shares at 254 pence each which is a 48 percent discount to Friday’s close.
Shares in the bank were down 20 percent at 395p by 11:11 a.m. GMT (6:11 a.m. EST), but they were still comfortably above the 254p issue price. HSBC’s Hong Kong-listed shares were suspended.
“It’s always difficult for a market that’s feeling jittery to absorb 12.5 billion of new stock,” said Jane Coffey, head of equities at Royal London Asset Management which is HSBC’s 24th largest shareholder according to Thomson Reuters data.
“I am not surprised the stock is down but they are doing the right thing and we are going to support the issue.”
The stock has halved in value since Lehman Brothers collapsed in September but HSBC’s relative resilience to the global financial crisis means it has outperformed European peers which have lost almost two-thirds of their value.
Its share price fall ranked it as the world’s fourth-biggest bank, just behind JP Morgan Chase, with a market value of just over $70 billion.
Several investors had told Reuters last week they would support a rights issue, and wanted management to act quickly to remove uncertainty hanging over its share price.
“The move seems to be timely and gives them greater flexibility and it certainly puts the bank in a better position but the success will be determined by the manner in which the market moves on from here,” said one top ten shareholder in HSBC who asked not to be named.
U.S. JOB LOSSES
Unlike many global players HSBC reported a profit for 2008 but it still took a hit with a pretax profit of $9.3 billion some 62 percent below the $24.2 billion reported for 2007.
The slide in profits was largely the result of a goodwill impairment charge of $10.6 billion in the United States.
Excluding the charge, pretax profit fell to $19.9 billion which was ahead of the $19 billion expected by analysts.
The bank also cut its dividend for the full year by 29 percent to 64 cents per share and said it would close its troubled U.S. consumer loans business, HFC.
HSBC’s losses in North America last year amounted to $15.5 billion, including the $10.6 billion goodwill charge which follows its troubled acquisition of Household, the U.S. consumer lending business bought six years ago for $14.8 billion.
“With the benefit of hindsight, this is an acquisition we wish we had not undertaken,” chairman Stephen Green said in a statement.
Group-wide the bank said that losses on bad loans jumped 44 percent versus 2007 to $24.9 billion.
HSBC has traditionally been among the best-capitalized banks in the world and had resisted raising capital or turning to governments for help while rivals absorbed billions of dollars in losses and scrambled for cash as the credit crisis deepened.
But finance director Douglas Flint said the bank may want to finance acquisitions as weaker rivals retreat from international markets, especially those that have had to take state help.
“We want to position ourselves both defensively for turbulent times and opportunistically for the options that will appear,” Flint told reporters. “There’s nothing on the go but we believe the opportunities will come to banks that have the ability to take such options.”
HSBC said the rights issue would add 150 basis points to its capital ratios, strengthening the core equity tier 1 ratio to 8.5 percent and the tier 1 ratio to 9.8 percent, restoring its capital advantage over rivals.
Alex Potter, analyst at Collins Stewart, said the improved capital strength was not enough to form an “obvious war chest” for acquisitions but that it meant HSBC still remained a “very conservative bank.”
“With stronger capital, greater diversity and better funding — these are rare qualities for a bank and we remain long-term buyers of the stock but see short-term weakness,” Potter said.
Others felt that even HSBC would struggle, however, as the global economy deteriorates.
“In HSBC we see vulnerability to the collapse in world trade and rising balance sheet risks,” said Sandy Chen, analyst at Panmure Gordon.
The company itself said it was “extremely hard to predict” its 2009 performance but added that business in January had been “strong and ahead of our expectations.”
The rights issue is being underwritten by Goldman Sachs, JPMorgan Cazenove, HSBC and three other co-bookrunners. It overtakes a 12 billion pound rights issue by Royal Bank of Scotland last year although exchange rate fluctuations mean the RBS one was bigger in dollar terms.
Responding to growing public anger of the scale of bonuses paid to many senior bankers, HSBC said no performance share awards would be made for 2008 and that no executive director would receive a cash bonus.
By Steve Slater and Myles Neligan
(Additional reporting by Daisy Ku, Douwe Miedema and Raji Menon in London and Tony Munroe, Parvathy Ullatil and Alison Leung in Hong Kong; writing by Paul Hoskins, Editing by Ken Wills, Ian Geoghegan and Hans Peters)