HSBC

This is the most favored bank and listed company here in HK and probably UK/USA for the past year or two since the subprime problems surfaced. But no more illusion should be placed on this bank for the future, why?

A number of factors have changed and its management had been slow in reacting to the current environment, here below are the facts:

• blanket deposit protection in HK - this raises cost of funds as depositors switch to higher rates at smaller banks;
• capital injection by UK authorities - it is one of the few banks that refused to accept capital from the UK govt, depositors may choose a govt sponsored bank over a totally independent one given the seriousness of the current crisis;
  
• fund raising - missed the opportunity to raise funds though a few UK banks raised capital with the current rally;
• faced downgrades on its outlook and possibly its debt as well;
• economies of the key regions where it operates deteriorate sharply which means heavy loan loss provisions on the loans or investments it made are on the horizon when it reports results for Dec08 and Mar09.
• limited avenue for new revenue - the contribution from retail wealth management sector has all but disappeared, now it has to rely on the bread and butter of interest spreads on conventional loans and the fees or interest it charged on below min balances. Given the zero interest rates environment, there is not a lot to earn even from interbank markets.
  

HSBC got herself in a quagmire after current price declines as the costs of raising capital have skyrocketed - capital raised at a lower price will have a more dilutive effect on current shareholders and even more so with the dividend. Any cut in dividend will drive its price even lower so it becomes a vicious circle. If you cut dividend before a rights issue, the dilution becomes even more severe. If you raise capital and do not cut dividend then the cash drain is huge. If you do both at the same time, then the impact is devastating. Look at Standard Chartered, the rights issue price is a discount of 40%+ of the current price before announcement.

HSBC may not have to use such deep discount as enticement for her shareholders, but its future price may be a total disappointment for her fans.