For HSBC, Questions of Vitality

For HSBC, Questions of Vitality

By LANDON THOMAS Jr. and JULIA WERDIGIER
Published: December 22, 2008
LONDON — Through more than a year of giant bailouts and bankruptcies, HSBC was one of the few big banks to emerge with its reputation largely intact.

Related Times Topics: HSBC Holdings PLC. HSBC Finance Corporation Credit Crisis — The Essentials

HSBC, the global financial giant, did bet on subprime mortgages — and lost. But it nonetheless managed to maintain a robust market value compared with its diminished peers, lending it an aura of unrivaled durability.
So much so that during a recent parliamentary debate in Britain, where HSBC is based, an opposition politician scorned the government’s borrowing policies by asserting that Britain’s creditworthiness had fallen behind that of HSBC.
Now, as the bank faces a sharp slowdown in the emerging markets where it earns the bulk of its profit, many investors are questioning HSBC’s ability to maintain this exalted standing.
Last week, HSBC shares listed in London sank more than 17 percent, hit by several analysts’ reports contending that the bank would be required to raise money or to cut its dividend sharply. On Monday, HSBC shares in Hong Kong fell 3.3 percent, after falling more than 9 percent late last week. In addition, there was the acknowledgment that HSBC might have lost the $1 billion it had invested with Bernard L. Madoff, the New York money manager who authorities say has confessed to running a $50 billion Ponzi scheme.
As banks throughout the world face uncertain futures amid the worst financial crisis since the Depression, HSBC — which spans the globe from its original home in Hong Kong to the Middle East, Latin America and North America — offered a vivid counterpoint.
Its share price outpaced the main indexes and still trades near its book value. Its assets are growing, with the $2.3 trillion on its books expected to grow by almost 20 percent this year.
Not only has the bank spurned government money, it has been — at least so far — one of the few financial institutions of size not to be required to raise capital.
But with the recent drop in its shares, HSBC’s critics are raising questions about the bank’s globe-girdling strategy, particularly its insistence on sticking with its struggling consumer finance unit in the United States.
HSBC gets three-quarters of its profit from emerging markets, which have underpinned its recent success. But three-quarters of its loans are still exposed to the stricken markets of the United States and Britain, which some investors argue will hold it back, after the global economy recovers.
HSBC became the world’s top subprime lender when it bought Household International in the United States in 2003. According to Knight Vinke, a small asset manager in Monaco that owns less than 1 percent of the bank’s shares, the parent group has injected $60 billion into HSBC Finance — including the purchase price of $15 billion — in a so far fruitless bid to turn around this flagging business. According to its research, the money would be better deployed in faster-growing emerging markets.
A spokesman for HSBC disputed the figure, saying the total amount was about $20 billion.
Knight Vinke argues that HSBC should leave this business and focus on its core area of expertise in Asia.
“There are steps to be taken, but if all else fails, you may have to walk away from it,” said Glen Suarez, an executive at Knight Vinke.
“We see HSBC’s comparative advantage being in developing its business in Asia,” he said. “We have always felt that subprime and Household International was a problem.”
In a report produced this year, Knight Vinke said that HSBC had been overly optimistic in assessing the risk of its subprime exposure and that if the bank were to take a write-down reflecting the full reality of its potential losses, it could total as much as $30 billion — a number that would require the company to raise cash. (My comment: CAUTION!!)
HSBC declined to address Knight Vinke’s assertions publicly, saying the firm’s small investment position undermined its credibility.
Still, bank executives and board members have met with Knight Vinke as it pressed its position.
HSBC’s position is that its subprime loans, while substantial, are different from those of most other banks because they are not bundled into complex — and at this point nearly worthless — securities like those that forced Merrill Lynch, Citigroup and others to take large losses. As a result, management argues, HSBC is not obliged to write down these assets as long as they produce a cash flow.
The bank has also said that it is a global institution, with a need to be in markets from Shanghai to St. Louis, and that it considers the United States housing market to be a crucial part of its strategy. It also said that writing off its investment in HSBC Finance would do lasting damage to its reputation.
As its rivals took their lumps, HSBC maintained a healthy cushion against losses of about 8 percent, a conservative position compared with the greater leverage of other banks. But now that troubled institutions like Barclays, the Royal Bank of Scotland and Citigroup have raised large sums of equity to bolster their balance sheets and enjoy the explicit or implicit support of national governments, HSBC no longer looks so secure.
What is more, the advancing slowdown in HSBC’s core emerging markets franchise is putting additional pressure on its earnings.
HSBC has said that its capital position was strong, but declined to comment on the recent reports predicting that it would seek a capital increase, which would dilute the value of existing shares. It has been careful to leave open the possibility of raising new funds in conjunction with a deal, or a major investment in a business.
For all the new questions, Julian Chillingworth, chief investment officer at Rathbones in London, said HSBC remained a refreshing contrast to an industry that seemed to lose its head in the housing bubble.
“It may well be that they have to raise capital, but there’s a much better chance for them to get support,” he said. “They didn’t commit the sins of others of relying on the wholesale markets, and they’ve been quite prudent.”
HSBC executives are by and large an austere, conservative lot, compared with their more expansive counterparts. Their attitude toward the banking excesses has been one of polite disdain as they turned down opportunity after opportunity to buy into the American investment banking market.
It is an approach that conveys a degree of rectitude not often seen in bankers these days. The self-denying tone flowed from the top, conveyed by the bank’s former chairman, John Bond.
His successor, Stephen Green, spare and unobtrusive, carries on this tradition, serving as an ordained priest in the Church of England.
He is also the author of a book titled “Serving God? Serving Mammon?” that wrestles with the idea of being a man of faith in the City of London.
Still, the bank has not been immune to temptation — witness the $1 billion it is likely to have lost from extending loans to funds that invested with Mr. Madoff’s firm.
There are signs, too, that the bank may be on the verge of some major decisions — particularly with regard to its troubled American business.
John Thornton, the former president of Goldman Sachs and a man known for his aggressive strategic thinking, joined the group board this month. He will also serve as nonexecutive chairman of HSBC North America — a position that will require him to work two days each week and will pay him $1.5 million a year.
It is not clear what, if any decision will be taken. Even with its recent troubles, the firm’s position is strong enough to support a midsize deal, especially for a bank with a strong position in the American Hispanic market, an area that has long been of interest for HSBC.
And analysts say that even HSBC cannot stay above the troubles around it.
“I’m surprised the shares have done so well in relative terms,” said Daniel Tabbush, an analyst at Crédit Lyonnais Securities, who wrote one of the reports that precipitated the stock sell-off.
“Now, we’re looking at the exposure to commercial U.K. real estate, the unsecured loan book, credit cards. Many banks around the world said they don’t have to raise capital, and then they do.”

More Articles in Business » A version of this article appeared in print on December 23, 2008, on page B1 of the New York edition.

http://www.nytimes.com/2008/12/23/business/worldbusiness/23hsbc.html?ref=business