At least, that's what Morgan Stanley thinks. Yesterday (1/14/09), they came out with a pretty big research note on HSBC (HBC), saying they think HBC will need up to $30 billion in equity and will need to halve its dividend. The note comes a day after our post highlighting interesting record options activity in HSBC, where we mentioned HSBC's lack of equity raises amidst the current crisis. Also worth noting per UK regulatory disclosures, hedge fund Eton Park Capital ran by Eric Mindich has had a short position in HSBC for many months. We recently covered Eton Park in our hedge fund portfolio tracking series where we examined their long holdings here.
With 57% of their loans in the US and UK, HSBC is definitely exposed to trouble, despite being a true international bank. Morgan Stanley thinks HSBC has one of the weaker capital ratios in Europe and the second weakest in Asia, and will face problems for the next two years.
An excerpt from Morgan Stanley's report,
"We have reduced our 2009 PBT forecast by 34%, which equates to a 39% drop in EPS and flows through to a 32% fall in 2010. We now forecast 2009 EPS of US55¢ and 2010 of US50¢; 46% and 60% below FactSet consensus, respectively. We have reduced our price target to 455p from 550p previously.
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In 2007 HSBC paid out $10bn in dividend. Since 1992 investors have on average elected to take 26% of the dividend in scrip. Analysing the history suggests investors become more risk adverse in times of distress, and in our view it would be imprudent for the management team to assume an average take up in 2009 and 2010. If we combine this with our estimate of the capital requirement discussed above, a sharp reduction in attributable profits in 2009 and 2010 as structural and cyclical headwinds take hold (2009: $6.6bn, 2010: $6.2bn), it suggests to us that HSBC will cut its dividend in 2009.
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Post a $20bn capital increase and a 50% dividend cut, we calculate HSBC would carry a clean Core Equity tier 1 of 7.2% (stripping out the AFS and insurance double counting), which looks reasonable given historical HSBC capital ratios and broadly in line with the recapped Santander, which has 7.1%. [Note Santander is not allowed to add back its €3.8bn AFS reserve, which equates to 80bp of capital]."
While HSBC might have weathered the subprime thunder relatively speaking, it seems as if they are still not out of the storm. As we highlighted in our January 13th post on HSBC, they have the oh-so-fun mix of leverage, large writedowns, and low capital raised. Add record options activity on top of that and things start to get interesting. We also highlighted the $45 level as a "make or break" level for HSBC on technicals. Wednesday at the open it gapped down below it. While a re-test of $45 from the underside is probable, things could get ugly for HBC shares.
Full disclosure: At the time of publication, MarketFolly was short HBC via puts
Links: Marketwatch, FT Alphaville
