In the wake of HSBC’s ground-shaking $17.7bn rights issue, the piece of analytical reaction we want to see is from Michael Helsby. He’s the Morgan Stanley scribbler who first vocalised the idea that the bank would make a monster call for cash – only to perform a screaming u-turn when his prediction was met with heaps of scorn.
But that was still under preparation mid-morning on Monday.
In the meantime, here are some snaps from Mr Helsby’s peers.
Robert Law at Lehman Nomura
HSBC’s results announcement appears aimed at protecting and enhancing what we see as the group’s competitively advantaged position in terms of capital strength, liquidity, asset quality (HSBC Finance notwithstanding) and geographic positioning. These advantages should allow the group to generate superior growth compared with other major banks, in our view. The shares stand on a multiple of 1.2x the pro forma TBVPS of $5.65. We would hope this book value proves relatively sustainable even in the current environment. In the longer term, we estimate a normalised EPS of still some $1.06 and a RoE of near 20%. We continue to favour the Far Eastern banks amongst the European names and over the domestic UK banks…
The 2008 dividend has been cut to $0.64 from $0.90. For 2009, the company is indicating three interim dividends of $0.08 per share and maintain a progressive dividend policy in line with long term growth of the business. Press reports (FT March 2) suggest that the company is implying a 5.5% yield on the TERP, or $0.38 before the capitalisation element of the rights issue. Although we consider a dividend cut as disappointing, we regard it as unsurprising in the current environment and HSBC remains one of the few banks where we would still be relatively confident of a cash dividend in 2009…
The outlook for 2009 is described as ‘difficult,’ with increased stress in personal and commercial loan books. However, the group expects parts of Asia, the Middle East and Latin America to ‘outperform.’ January trading is said to have been ahead of plan, particularly in GBM. Group NPLs were $25.4bn in line with our expectations and up from $19bn at the half year. However, this deterioration is significantly lower than at the domestic UK banks.
Abigail Webb at Credit Suisse
On the results, net attributable profit of $5.5bn and PBT of $9.3bn, were significantly below our respective estimates of $15.9bn and $21.7bn mainly due to a writeoff of $10.6bn relating to the entire goodwill of HSBC Finance Corporation. The numbers also included $6.1bn of writedowns, $6.7bn positive fair value gains and $2.8bn of exceptionals. Underlying PBT of $16bn was therefore around 18% weaker than our underlying forecast of $19.4bn, with the difference mainly due to impairments which were $1.7bn higher than our estimates and revenues which were around $2bn lighter. More importantly it seems that H2 08 underlying PBT was running at just over $3bn, down from $13bn in H1 08 implying an annualised runrate of $6.5bn, less than half our current 2009 forecast of $15bn. HSBC has also cut their dividend by 29% yoy, and announced further dividend cuts for 2009 (see below). Finally, HSBC has announced that they have put all businesses excluding credit cards in HSBC Finance Corporation into runoff. On our calculations the new TNAV per share post rights issue falls to $4.90 from the reported $5.45 (which in itself was lower than consensus) leaving the stock trading on 1.2x 2008 TNAV based on the TERP of 416p compared with 1.25x 2008E TNAV on Friday 27th February. The dividend rebasing still leaves the stock yielding 5%.
Bruce Packard at Evolution
Reasons given for the rights issue: company will be better at responding to unforeseen events and enhances ability to grow through targeted acquisitions. Also statement refers to higher regulatory capital requirements and changing market sentiment, so HSBC have raised the top end of the target tier 1 ratio range raised to 10%, previously top end of range was 9% (8.9% tier 1 reported Q3 08). The rights issue will add 150 basis points to HSBC’s capital ratios, strengthening the core equity tier 1 ratio to 8.5 per cent and the tier 1 ratio to 9.8 per cent, both on a pro forma basis as at 31 December 2008. Even without the rights issue capital ratios look healthy, with tier 1 ratio of 8.3 per cent and core tier 1 of 6.8% FY 08. Interestingly the rights issue is being underwritten by Goldman Sachs and JP Morgan Cazenove, NOT Morgan Stanley who advised them to buy Household in the first place.
VALUATION AND RECOMMENDATION — We need to work through the numbers and come up with a new target price. Conference call is at 10 AM — if management do a good job at justifying the reasons then shares should stabilise after initial weakness at the open.
Alex Potter at Collins Stewart
Rights will raise equity Tier 1 by 150bp to 8.5% which is not an obvious war chest but does improve capital strength of what remains a very conservative bank…
Group results in line with strong funding. PBT of $19.9bn is equal to our estimates, pre-goodwill. Group posted 2% underlying revenue growth and flat costs (creditable) but this is more than offset by the loan impairment line (+45%). Loan-deposit ratio improved again to 83% (from 90% at Jun-08). Capital was weaker than expected, mainly due to forex; we would have expected a 9.1% equity Tier 1 ratio (incl. rights).
Hong Kong results weak, negative for STAN. By region, Europe results were stronger than expected (due to GBM) with an offset from a very weak HK performance. Fee income fell 42% yoy in 2H08 as economic growth slowed and the loan impairment rate jumped from 26bp in 2007 to 81bp in 2008 (c.140bp 2H08). This reads negatively for StanChart results tomorrow c.40% of that bank.
Remain long-term positive on stock, safety and stability vital. At 1.2x tangible book, HSBC is not cheap relative to other banks. However, it is also not easily comparable 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.
The HSBC conference call is being webcast here at 10am.
Oh, and if you are a glutton for punishment, video interviews with Stephen Green and his boardroom colleagues are available at Cantos here.
Related links:
HSBC hates sub-prime – FT Alphaville
HSBC unveils record £12.5bn rights issue – FT.com