HSBC takes £17bn hit on bad loans

From The Sunday TimesMarch 1, 2009

HSBC takes £17bn hit on bad loans
Bank set to launch Britain’s biggest rights issue to guard against the global recessionIain Dey and John Waples

HSBC is to own up to the full horror of its American sub-prime business, Household, when it unveils a £7 billion goodwill write-off in addition to a £17 billion provision against rising bad loans.

The provisions will be announced tomorrow alongside a heavily discounted £12 billion rights issue — the biggest ever held in Britain — and a dividend cut, as Stephen Green, the bank’s chairman, moves to shore up its balance sheet.

The fundraising will make HSBC the strongest bank in the world that has not received a cash injection from the state.

Its tier-one ratio, a key measure of financial strength, will rise from 8.5% to 10.5%. Analysts say it will provide a $40 billion (£28 billion) buffer against further bad debts.

Even after the dividend is halved, the annual yield is expected to be about 5.5%, making it one of the highest in the FTSE 100. And despite the scale of the bad debts, the group will still be profitable.

The HSBC board has decided to waive its bonuses in light of the fundraising, including an estimated £1m bonus for chief executive Michael Geoghegan.

Household has now lost the bank more than $30 billion since the summer of 2006 — more than twice what HSBC paid for the bank just six years ago.

Large parts of the operation will now be closed down and almost all the value attributed to the business will be wiped out. Out of the $24 billion of provisions, two-thirds was against Household.

HSBC briefed its biggest investors about the rights issue on Friday and yesterday morning spoke to a further 30 banks. The offering is being underwritten by Goldman Sachs and JP Morgan Cazenove.

The decision to press ahead with the fundraising follows a worsening economic outlook for Asia, Europe, Latin America and the US.

- Lloyds Banking Group is poised to re-open negotiations with the Treasury over plans to dump £250 billion of toxic loans into the government’s asset-protection scheme.

Talks broke down last week after the government told Lloyds it would have to pay higher fees to take part than Royal Bank of Scotland.

As part of the deal, the government stake in Lloyds is expected to rise above 50%. Lloyds will also have to agree to defer bonuses for top managers over two years.


http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5822089.ece


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