Q&A: Should I buy into HSBC's rights issue?

From Times OnlineMarch 2, 2009

Q&A: Should I buy into HSBC's rights issue?
We answer the pressing questions for shareholders and borrowers as the bank announces plans to raise billionsKathryn Cooper

BANKING giant HSBC today asked shareholders to stump up £12.5 billion to help it through the economic downturn, but stockbrokers gave the rights issue a lukewarm reception.

Britain’s biggest bank announced the country’s largest-ever cash call alongside a 62 per cent fall in pre-tax profits to $9.3 billion (£6.5 billion). It also cut its dividend for the full year by 29 per cent.

However, the results contained some good news for mortgage borrowers: the bank said it would aim to lend £15 billion this year, double 2007’s total.

The announcement will raise hopes that the mortgage freeze that has prevented buyers getting into the property market could be starting to thaw.

Under the terms of the rights issue, shareholders will be offered five new shares for every 12 they already own at a reduced price of 254p, a discount of 48 per cent to Friday’s close of 491.25p.

Investors who do not take up their rights will see the value of their holding diluted because there will be more shares in issue.

We answer your questions.

Q: I’m a shareholder. Should I take up the rights?

A: HSBC shares are not as widely held as those of Halifax Bank of Scotland (now part of Lloyds Banking Group), but thousands of small investors will still have to decide whether to take part in the fund raising.

Expert opinion is divided on what they should do.

Jonathan Jackson, head of equities at stockbroker Killik & Co said: “The group says the rights issue enhances its ability to deal with the impact of an uncertain economic environment, and to respond to unforeseen events, whilst providing options in relation to opportunities for those with superior financial strength.

“However, we believe it is more a reflection of the sharp deterioration in the group’s markets and the prospect of continued weakness to come. Against this background, the market will continue to worry about the group’s capital position and we would continue to avoid the shares.”

However, Nick Raynor, investment adviser at The Share Centre, another broker, drew comfort from the fact that the issue will be ‘fully underwritten’ – in other words, investment banks will take up the shares if investors do not.

“If clients can afford to, they should take up the rights,” he said. “The issue should put HSBC in a strong position in that it should not need fresh capital from either the government, or Middle Eastern investors, as with Barclays.”

Q: What are my options?

A: The first option is simply to take up the shares. The second is to sell the entitlement, known as the nil-paid rights, in the market for cash (alternatively the investor could let the rights lapse, and receive a cheque at the end of the issue).

The third option is to 'tail swallow', or to take up as many rights as possible to leave the investor in a cash neutral position.

According to Richard Hunter of Hargreaves Lansdown Stockbrokers, you should ask if you are happy with how the company plans to use the money, and whether putting in more money would make your portfolio overly heavy in banks.

Q: Are rights issues a good thing?

A: It depends. A study by JP Morgan of rights issues between 1989 and 1994 suggested they are a signal to buy only if the economy is showing signs of a recovery.

On the other hand, a study by Morgan Stanley found that the bigger the rights issue, the better – which bodes well for HSBC’s huge cash call.

Q: I’m a borrower. Is this good news for me?

A: Yes, in the sense it shows some banks are still willing to lend. As well as doubling the amount of money available for new loans, HSBC said it lent £17.1 billion in 2008, up from £9.1 billion in 2007. Its share of the gross mortgage market also went up from 2.4 per cent to 7 per cent.

One of its big successes was Ratematcher, when it offered to match borrowers’ cheap two-year deals from rivals when they came up for renewal. This led to a 200 per cent increase in mortgage sales.

Q: I’m remortgaging. Is HSBC a good bet?

A: It has some market leading deals if you have a big deposit, although it is always worth shopping around.

It has a market-leading five-year fix at just 3.99 per cent with a £999 fee if you have equity of 40 per cent and want to borrow no more than £250,000. It also has a two-year fix at 2.99 per cent with a £599 fee on the same basis

http://www.timesonline.co.uk/tol/money/article5832350.ece