Saturday, February 28, 2009

HSBC plans £12bn-plus share issue
From Financial Times:HSBC is planning to
raise more than £12bn through a share issue as the banking group seeks to shore
up its capital buffers in order to cope with the global economic downturn.The
bank was on Friday night finalising the issue, which is likely to be unveiled
alongside its full-year 2008 results on Monday. However, people involved in the
discussions warned that details such as the exact price of the offering had not
been set and it could still be postponed. HSBC is also expected to announce a
cut in its dividend.
HSBC plans £12bn-plus share issue

I am rather interested on the way FT wrote. While it had stated in the previous paragraphs about the strength of HSBC, the following paragraph turned sharply to the adverseries HSBC have been facing. Can a "well-managed bank" worsen by 45% in only 6 months? Can a risk-management focused bank have its Basel II ratio deteroiated from a very secured level to an insufficient level? Can a bonus-and-power-focused senior management team be willing to dilute their own shares by issuance of new ones? Without changing the management and divesting the losing units in North America, I cannot see in any way its strength be underscored.

Lets also read in parallel to other two news:
1. The New CEO of HSBC Hong Kong. Pay attention to her background: starting as a trainee, once upon a time be in administration area, later on swapping to corporate banking, in local and in Australia, then global corporate banking, next general manager of HK, eventually to CEO of HK. She is a very typical HSBC-made employee, and her corporate banking background may mean a return to the "original" business of HSBC. Her involvement in public affairs, particularly in HR related area, may also mean her understanding on recruitment, remuneration, and layoff (!!) areas. Thus, it may mean a further cost-cutting scheme on "unrelated non-core" business. Both of these can be positive news to HSBC Hong Kong. Hopefully, it also means a change of direction of HSBC group as a whole.

2. HSBC will still pay bonus more than 1 billion pound despite the call on bonus cut by Gorden Brown. It may be the last action the existing management take to protect themselves before they take the golden parachute.Combining the 3 news together, can it mean a big change on both the management team and the direction is coming? Can it also mean that HSBC price may first subject to a further drop and then rally and in the longer run at least recover to a more reasonable level? Can it also mean that the issuance of new shares may not take place if neither the existing board nor the existing management likes to dilute their own stakes?

[the possibility of China invests on HSBC]
......the Social Security Fund [of China] also recorded a loss as well as a write-off of assets at a substantial amount (which I forgot).Nevertheless, despite my personal believe of no further offering of shares, it is possible that China Investment will buy the shares of HSBC for political reason.I still tend to suspect that the current HSBC management has no gut to make a really huge write-off; instead, it may attempt to emphasize its profitability, deduct the dividend, continue to pay the bonus, and announce perhaps another cost-cutting scheme.

[responses to the "logical movement: provide as much provisions first, then report about profitability and adjust the write-off asset when market improves]
......what you said is logical as a general movement. Nevertheless, if the management had followed such moves, they would have taken a deep bath long time ago. Their reluctance to take such action is the signal that HSBC has screwed up more than we have imagined. In many previous posts I have already shared my observations on HSBC problems on cash-flow, potential cash obligation, and capital insufficiency. Obviously HSBC cannot suffer any further huge drops on share price while a massive write-off will absolutely lead to this result. The issuance of new shares will also signal the potential deficiency of HSBC capital. Although the discount price of the new offerings can be seen as the "bottom price", it will completely damage the confidence of the existing shareholders, big or small, and initiate a REAL wave of divestment. Please remember that HK citizens are not the only shareholders, and not every HK citizen will invest on emotion. Now if unfortunately such case happens, HSBC share prices will be further lowered by the excercising of the existing short position. HSBC management will also be forced to resign at once.From the way they deal with their own matters so far, I reckon they would have believed that they had passed the point of no return and must continue the bluffing till the market improves. Therefore, the more benefital move is to report the positive side, the profitability, particularly after averaging the worst period to the less worse one, and emphasize their coming action on further cutting down cash outflow and a return to traditional bank business not only to keep the clients but also to please the big shareholders, particularly on USA side. In return they may look for a buy-back of time to sit through the fluctuation and avoid a drastic change on management level.

Such move may stablize the HSBC price on Monday, especially by the small HK investors who have fallen in love with HSBC for so many years. Yet, from the big investor's point of view, it will actually add more uncertainties about the future, and will also encourage the speculators on short positions to rebuild the positions and take actions on the forecoming crisis.

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