Monday, March 2, 2009

HSBC to raise US$17.7 billion, will cut 6,100 U.S. jobs as profits fall

LONDON — HSBC PLC, Europe's largest bank by market value, reported Monday a 70 per cent drop in 2008 net profit and said it would raise US$17.7 billion in a share issue, while cutting 6,100 jobs as it shuts down its consumer loan businesses in the U.S.

HSBC said it would scale back lending in the U.S. after being stung by the collapse in subprime mortgage-backed securities - although its HSBC Bank USA branch retail banking business will remain.

In Canada, HSBC operates a Vancouver-based retail bank and other financial services companies.

By turning to investors for new capital instead of asking for government aid, the bank would avoid the strings that go with the bailouts given to other British banks. It also said it would cut its dividend and not pay bonuses to top executives.

In 2008, net profit tumbled to US$5.7 billion from $19.1 billion a year earlier as the company wrote down the value of assets, particularly in the U.S.

The markets were spooked by HSBC's report, sending the bank's shares down 20.2 per cent to the equivalent of US$5.53 in trading Monday on the London Stock Exchange.

Analysts said the size of the share issue and writedowns scared off investors.

'What is perhaps most worrying is the fact that HSBC was seen as better placed than most of its peers and essentially any hope that confidence was returning to equities has been quashed once again," said Matt Buckland, a dealer at CMC Markets.

The company said senior executives - including CEO Mike Geoghegan - will not receive any bonuses for 2008.

That decision comes amid a storm of public outrage about bankers' bonuses - in particular, the revelation that Fred Goodwin, former CEO at Royal Bank of Scotland, will receive an annual pension of 693,000 pounds, or US$990,000.

Since Goodwin's departure in November, RBS has become mostly state-owned amid record losses, and the government has recently said it will seek to prevent Goodwin from receiving the money, which he has said he would try to keep.

In 2008, HSBC set aside US$24.9 billion in provisions for markdowns such as bad loans and credit risk, up sharply from the $17.2 billion in 2007.

On top of this, HSBC wrote off all the goodwill - the intangible value of an asset, such as a brand name - on its U.S. personal finance operations, to the tune of $10.6 billion. It cited a "significant deterioration in U.S. employment and economic outlook in the fourth quarter of 2008."

Due to the weakness of the U.S. market, HSBC said it will scale back its consumer lending operations there - shutting down its HFC and Beneficial brands, causing a loss of 6,100 jobs.

'Management believes it will take years before property values return to the levels seen prior to the decline and, as such, has concluded that recovery in the sub-prime mortgage lending business is uncertain and the industry is unlikely to stabilize for a number of years," HSBC said.

The company said its retail bank branch business in the U.S. will not be affected by this decision and it will continue to issue credit cards.

Green said U.S. operations would likely seek to grow - but only incrementally, ruling out any big acquisitions - with a focus on business banking. "We are not turning our backs on the U.S.," Green said at an analyst presentation of the earnings report.

HSBC also confirmed that it lost about $1 billion in the alleged investment fraud by Wall Street financier Bernard Madoff.

Amid the drop in profits, HSBC's Tier 1 capital ratio - a key indicator of a bank's financial strength - fell to 8.3 per cent in 2008 from 9.3 per cent a year earlier. The bank said the share issue would boost that to 9.8 per cent.

'This capital raising will enhance our ability to deal with the impact of an uncertain economic environment and to respond to unforeseen events," said chairman Stephen Green in the earnings report.

The $17.7 billion will be raised in a rights issue and is meant to shore up the company's capital position without resorting to government handouts. Shareholders will be offered five new ordinary shares for 12 existing shares at a price of 254 pence, a 47.5 per cent discount to the share's closing price on Feb. 27. The move is subject to approval by shareholders at a meeting on March 19.

The company, which unlike rivals Royal Bank of Scotland PLC and Lloyds Banking Group PLC has avoided taking government bailout funds, cut its dividend to 64 cents a share, a 29 per cent decrease from 2007.

For 2009, HSBC indicated the dividend may be reduced yet again - it expects to pay a dividend of eight cents a share for each of the first three quarters, with a variable payout for the final quarter.

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