HSBC admitted today that its acquisition of US sub-prime lender Household in 2003 had been a disaster: it’s been forced to write down its value by over $10bn, dragging the bank’s 2008 pre-tax profits down 62% to $9.3bn. It’s now washing its hands of the division, announcing plans to close it down (with the loss of 6,100 jobs) – and in order to plug the holes in its balance sheet, has been forced to tap its shareholders for £12.5bn, the biggest rights issue in UK corporate history. Yet despite the double-digit drop in its share price this morning, it actually looks to have come out of last year relatively well…
Yes, HSBC took a bath in North America, where its total losses amounted to $15.5bn. Green admitted today that the 2003 deal to buy Household was probably a mistake, with the benefit of hindsight, and has now decided to give up on it entirely. But elsewhere, the bank’s business was pretty robust – every other region finished the year in the black, with emerging markets performing particularly well. In fact, if you strip out that big US write-down, HSBC's profits were nearly $20bn, which is only 18% down on the year before.
Today’s rights issue has been priced at 254p a share, a fairly steep 48% discount to last Friday’s closing price. The £12.5bn it raises (and unlike some recent cash-calls, the City seems to think it will actually get it) will boost its core capital ratio to a very healthy 8.5%. As a result, HSBC won’t just be able to cover the big Household-shaped hole in its bank account – it’ll also be virtually the only big bank with a war-chest to pick up cheap deals. As Green put it today, the cash-call will ‘give us options regarding opportunities which we believe will present themselves to those with superior financial strength’ (we think that's what he means anyway).
As usual, Green was making all the right noises this morning. As well as warning of the challenges ahead, he also admitted that the banking industry had ‘done many things wrong… Inappropriate products were sold inappropriately by many. Compensation practices ran out of control and perverse incentives led to dangerous outcomes... The industry needs to recover a sense of what is right and suitable as a key impulse for doing business.’ And he’s promised that no UK-based HSBC executives will receive a penny in bonuses this year (he already gets his own bonus in shares rather than cash). If he's not careful, at this rate he might end up being the acceptable face of British banking...
But the most important thing is that HSBC, despite its size, hasn’t had to tap the Government for funds – so it’s not in thrall to the politicians. Its US clanger notwithstanding, it’s widely considered to be a pretty well-run operation – and it will now possess unrivalled financial firepower within the sector. So relatively speaking, it looks in pretty good shape to cope with the traumas of 2009...
In today's bulletin:
HSBC launches record rights issue as profits slump 60%
I was dumb, says Warren Buffett
Editor's blog: The great British booze problem
Ryanair: in for a penny, in for a pound
Do it right: Seven ways to manage team morale