Just to stir the pot, here’s a piece of commentary from the specialist sales desk at UBS – dissing Morgan Stanley’s aggressive sell note on HSBC, which argued that the bank might have to raise upwards of $20bn.
HSBC- setting the record straight
** HSBC (Buy, PT 770p)- we don’t often comment on competitor research but there are three points in a note out today. The note states that HSBC’s capital levels are overstated due to double counting of capital in insurance business (50bps), the writeback of a negative AFS reserve to tier 1 (130bps) and the mark-to-marking of the Household loan book (200bps); which would mean core tier 1 ratios fall to 3.6%. For this reason they believe HSBC needs to raise up to $30bn of new capital. They also believe the HK bank is undercapitalised rel to peers.
** We’d say three things:
(i) Mark-to-marking any banks loan book would raise the need for significant amounts of capital – HSBC and other banks use accrual accounting for loan books – why possibly should you mark-to-market loans?
(ii) The HK bank is much bigger & better funded than domestic peers, so it is ridiculous to say they need the same capital ratios as small standalone HK banks,
(iii) On the AFS point, yes they do that; but so do most other banks (except Postbank). We also believe the $12bn -ve AFS reserve will start to reverse from here, primarily as US govt has been buying GSE debt (Majority of AFS assets) so spread widening will start to reverse. When this happens, your core tier 1 will fall but Tier 1 regulatory capital will go up. HSBC also points out that only 3% of its AFS securities are classified as level 3 assets vs much higher levels elsewhere.
** Although we agree HSBC may cut its dividend in half & raise some capital, our estimates are much more modest – around $10bn, which we think will be 15-20% dilutive. The other key point is that HSBC can raise this money from their own shareholders and importantly at a premium to book value. This is more than what most banks can say. Happy to stay Buyers, PT 770p.
Related links:
‘Why we STILL think HSBC needs $20-30bn of capital and to halve its dividend’ – FT Alphaville
Why we think HSBC needs $20-30bn of capital and to halve its dividend – FT Alphaville