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HSBC to Raise $17.7 Billion as Subprime Cuts Profit   2009-03-03 - Bloomberg

HSBC Holdings Plc plans to raise 12.5 billion pounds ($17.7 billion) in the U.K.’s biggest rights offering as it eliminates 6,100 jobs and closes consumer lending units in the U.S. after subprime losses cut profit.

Europe’s largest bank by market value will sell shares for 254 pence each, with existing investors able to buy five shares for every 12 they already own, the London-based company said in a statement today. The stock fell 19 percent to 399 pence in London trading, its biggest drop since July 1992.

HSBC said full-year net income fell 70 percent after losses in North America, where it bought Household International Inc., the biggest lender to homeowners with poor credit histories, six years ago. The bank, which gets more than 75 percent of profit from emerging markets, must now cope with recessions in some Asian economies.

“We are playing the ball from where it lies,” Chief Financial Officer Douglas Flint said on a call with reporters. “In 2003, when we acquired Household, nobody foresaw recession and depression in the U.S.”

Net income for 2008 fell to $5.73 billion compared with $19.1 billion the previous year, HSBC said. That was less than the $13.6 billion median estimate of 10 analysts in a Bloomberg News survey. HSBC cut its 2008 dividend by 29 percent to 64 cents a share, and said executive directors won’t receive bonuses for last year.

North American Loss

The bank reported a pretax loss of $15.5 billion from North American operations, compared with a profit of $91 million in 2007. In Europe, pretax profit rose to $10.9 billion from $8.6 billion. Profit from Hong Kong fell to $5.46 billion from $7.34 billion, while earnings from the rest of Asia rose to $6.47 billion from $6.01 billion.

Slowing Asian economies may force HSBC to raise more capital in the future, said Alan Beaney, a fund manager at Principal Investment Management in Sevenoaks, England, which oversees about $2 billion in assets.

“My worry is that the Far East has slowed down lately and will catch up with developed world, so bad loans are likely to get worse,” Beaney said.

Chairman Stephen Green said HSBC’s January performance beat the bank’s expectations, though the rest of 2009 is “extremely hard to predict.”

“The general lack of international lending is a cause for concern, and will put further pressure on the availability of credit,” Green said in a statement.

HFC, Beneficial

HSBC bought Prospect Heights, Illinois-based Household International for $15.5 billion in 2003. The unit is now called HSBC Finance.

Today, Flint said HSBC plans to close the unit’s HFC and Beneficial consumer lending units in five to seven years, cutting 6,100 jobs. As part of this effort, HSBC will shut most of its 800 consumer lending outlets in the U.S., he said.

HSBC may have to take an additional $34 billion of losses if it’s forced to write down subprime assets still on its books to fair value, according to New York-based Knight Vinke Asset Management LLC, which has pushed HSBC to spin off the U.S. unit.

“We believe that this is increasingly likely given that Household is effectively no longer a going concern and that market conditions in the United States continue to deteriorate,” said the firm, which oversees about $3 billion including HSBC shares, in an e-mailed statement.

‘Liquid and Profitable’

While HSBC has set aside about $53 billion to cover bad loans during the past three years, it has avoided taking U.K. government funding, unlike Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

HSBC is one of world’s strongest banks by some measures. The bank’s market value of $68.2 billion ranks behind only Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd. and JPMorgan Chase & Co.

HSBC will have a Tier 1 capital ratio of 9.8 percent after the rights offer, the bank said today. That compares with 11.9 percent for New York-based Citigroup Inc. and the 10.7 percent ratio Charlotte, North Carolina-based Bank of America Corp. will have after it receives emergency funds from the U.S. government.

“Today HSBC is well capitalized, liquid and profitable,” Green said in the statement.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are leading the banks that are underwriting the share sale, guaranteeing they will buy any shares investors may not order. HSBC will raise 12.85 billion pounds before commissions and costs relating to the sale, the company said.

Madoff Risk

HSBC said in December that it had $1 billion at risk after providing financing to funds that invested with Bernard Madoff, whose New-York-based money-management firm collapsed in an alleged $50 billion Ponzi scheme.

The bank booked a gain of $2.4 billion from the July sale of seven regional banking units in France to Banque Federale des Banques Populaires.

HSBC has declined 40 percent this year, compared with a 42 percent drop in the five-member FTSE 350 Banks Index.

“They are doing the prudent thing,” said Lothar Mentel, chief investment officer at London-based Octopus Investments Ltd., which manages 600 million pounds, in an interview with Bloomberg Television. “If you have a reputation as being the best capitalized bank in the world you want to keep it that way.”

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