HSBC Announces Record Rights Issue, Job Cuts, End Of “Go-Go Years”
HSBC announcing a record rights issue has triggered a fresh loss of confidence in the financial sector, causing the FTSE to fall this morning to the kind of level we haven’t seen since the gnashing-of-teeth, let’s-just-join-a-commune times of last October. The news that HSBC needs some drastic measures to keep its capital on an even keel means that even a bank relatively unaffected by derivatives trading and subprime mortgages, thanks to its vast global portfolio, is finding it tough. Lord help the rest of them, goes the reasoning – hence a similar drop in the price of RBS (who have since rallied again), and Lloyds (who rallied only to fall even lower).
HSBC’s rights issue is a process of generating more capital through the sale of shares – it wants to maintain its position as having a high level of capital, a position compromised by their contracting profits (down 62% for the last quarter) and the fact that bailed-out banks have had their capital levels boosted by governments.
They’re also planning to scale back their US consumer operation that has been nothing but trouble since they bought it back in 2003 off Household International Inc. – they’ve ended up with a company whose escalating losses are cancelling out profits over HSBC’s tenure, and which HSBC is also having to pour money into in the form of goodwill payments. 6100 jobs are going thanks to the bank winding down to just a credit-card business. Stephen Green, HSBC chairman, said: “With the benefit of hindsight, this is an acquisition we wish we had not undertaken”, somewhat different from what CEO Michael Geoghegan said about the subprime adventure in August (!) last year: “Sub-prime business is a growth business overall. I’m sure that, when all this settles down, you’ll come back and you’ll look at banking in the United States and see traditional banking is growing at X but sub-prime is growing at 2X”.
And he’s going to be eating those words off some IKEA kitchenware, as he’s not going to be getting a bonus this year; cutting thousands of jobs and still getting a bonus, especially alongside the Goodwin furore, would need some cosmically powerful explanation. The announcement was full of contrition and Select Committee-style apologies: “The industry needs to recover a sense of what is right and suitable as a key impulse for doing business…we strongly believe that the industry must respond to the requirement for a more sober and reasonable approach to compensation…It is clear that the banking industry got it wrong in the go-go years”. Ah yes, those years when the banking industry danced on podiums in cheap lingerie.
HSBC’s troubles have been offset by growth in new markets, including a whopping 64% profit increase in China. But as MarketWatch notes, if the Dubai dream ends up dying, and China’s growth slows down, HSBC could start to feel the burn in those areas too. There’s banter about HSBC using its bolstered capital to fund an acquisition of some sort, but maybe they should hang onto that comfy 10% capital ratio for a rainy day.
Their Chief Economist, Stephen King, certainly doesn’t see a glowing global picture, envisaging in the Independent today a Marxist future where we all get into our protectionist trenches and start tilling the land for the common national good: “We’ve lived through decades of plenty, where incomes have risen rapidly, where credit has been all too easily available and where recessions have been mostly modest affairs. Suddenly, we’re facing a collapse in activity on a truly Marxist scale. It’s difficult to imagine the world’s love affair with free markets being sustained under this onslaught…We may avoid a 1930s Depression but, increasingly, we may find the best we can hope for is a 1990s Japan.” Expect freaky Aum-esque cults and a Super Famicom revival soon.
Posted by Ben Beaumont-Thomas in Hot Money | March 2, 2009 2:12PM |