It’s not how it looks, honest. HSBC Holdings Plc. announced a shock $17.7 billion (Rs91,686 crore) rights issue on Monday, saying the move was partly designed to help it make opportunistic acquisitions. The reality is that this is a highly defensive equity raising. The cash call comes a little more than a month after analysts at Morgan Stanley questioned whether HSBC’s capital ratios were all they seemed.
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Whatever the merits of the analysis, it has weighed heavily on the bank’s shares. But the rights issue should now put HSBC’s financial health beyond reasonable doubt. Its core tier I ratio will reach 8.5%, giving HSBC about $16.5 billion of room for further write-downs before falling below the 7% that investors nowadays seem to see as a minimum. HSBC clearly needs the extra buffer, much of which could be absorbed by fresh losses.
Meanwhile, HSBC’s Asian growth engine, which accounts for 60% of pre-tax profits, is starting to creak. Buried in the full-year results, loan impairment rates in Hong Kong increased at least 10-fold year-on-year, albeit the numbers remain small.
HSBC had good reason to tap shareholders. It is no longer the only safe bank in town. Rivals’ balance sheets have been rebuilt—often with state help—and deposits have been guaranteed by governments. Without a rights issue to maintain its relative capital advantage, HSBC risked seeing an end to the flood of depositor and private wealth money it has enjoyed in recent months.
How much of the new capital can HSBC really deem available for acquisitions? Being among those few banks that have stayed above water unaided may give HSBC an edge when it comes to buying up emerging market assets. But expect most of HSBC’s new billions to stay squarely on the balance sheet.