Is HSBC the latest initiate into the ranks of troubled UK banks? After a nasty session on the Hang Seng, which saw HSBC shares drop 3.9 per cent on Monday, analysts were expecting a similar performance on the FTSE. But shares were holding out in morning trade, flat at £8.40, 10:00am BST. Odd, after four days of negative newsflow.
HSBC is due to be making a statement tomorrow.
On Sunday, the UK’s Telegraph newspaper reported that the bank was preparing to announce a further $1bn writedown on subprime-linked business.
On Monday, news that Morgan Stanley and Goldman Sachs cut their rating on HSBC stock in two brokers notes, reported by Bloomberg, didn’t exactly help. Michael Helsby at Morgan Stanley said:
It seems incongruent that the market should be viewing HSBC as a safe haven.
And at Goldman, analyst Roy Ramos waxed dramatical, when he saw…
…an annus horribilis of sorts for HSBC.
There were also criticisms doing that rounds that the bank isn’t protecting itself well enough against rising mortgage defaults. According to the WSJ’s “heard on the street” column, analysts at Lehman Brothers said the bank would have to commit an extra $2.4bn to default provisions in its US consumer-lending business.
And if all that wasn’t enough, then consider also the news Friday about HSBCs SIVs. SIV worries are usually a little kiss of death for a bank’s shareprice. It seems the market is paying little attention. Equity analyst Sandy Chen at Panmure Gordon issued a sell recommendation on fears that the bank would have to consolidate its two structured investment vehicles onto its balance sheet.
Yada yada. Except HSBC’s SIVs are some of the biggest out there. Cullinan, in fact, is the biggest SIV out there. The largest SIV in the world, named optimistically after the largest diamond in the world, has an estimated $27bn in assets under management. It’s also notable for having expanded faster than any other SIV - swelling to a portfolio peak of $35bn in just 18 months.
Asscher, HSBC’s other SIV (named after the brothers who cut the Cullinan diamond) is known to be smaller, but has a portfolio cap at $50bn. HSBC didn’t get back to us to confirm its current size.
Consolidating those two SIVs on balance sheet - as Sandy Chen thinks may happen - would be pretty crippling.
While neither SIV’s name has really been in the headlines, Panmure has some reason to be fearful of Cullinan and Asscher. Both are poor performers. The Net Asset Value (NAV - that is, the value of portfolio assets to capital notes after leverage) for Cullinan currently stands at 69 per cent, according to Moody’s. Asscher’s NAV is at 71 per cent.
Both NAVs are down around 10 per cent since early September and slightly underperform the SIV NAV average - which was 71 per cent at the beginning of November. That might be explained by the contents of HSBC’s SIV portfolios. Back in January, when it launched, the head of SIVs at HSBC, Dominic Swan, said that about 10 percent of Asscher’s portfolio was to be invested in triple-A cash CDOs, with about 40 percent in residential mortgage-backed securities. Ouch.
But it’s important to stress that a lot is not really clear. While other SIVs have been hamstrung by declining NAVs - a fall below 75 per cent usually puts a SIV in a restricted state of operation - HSBC’s SIVs keep their portfolio tests a closely guarded secret, known only to them and the rating agencies.
FT Alphaville does understand, however, that failure to comply with the secret tests, “may result in the downgrading of the programme”. And given that Moody’s have put the capital notes of both HSBC’s SIVs on rating watch negative, could something troublesome be in the offing?
