TOP CONTRIBUTORS

Jonathan J. Smith

Daniel Jones

HSBC Holdings, PLC (Symbol: HBC) is a London-based banking and financial services organization that isn't indebted to the British government. The company made a $17.7 billion rights offering in the beginning of March 2009. All $17.7 billion of the rights were purchased (including 97% by shareholders), which increased HSBC's Tier 1 Capital Ratio from 8.3% to 9.8%.^[1] The move has set the company apart from several U.K. competitors, like Barclays (BCS), Royal Bank of Scotland (RBS-LN), and Lloyds Banking Group (LYG), who have resorted to borrowing.^[2]

Like many of its competitors, HSBC has been affected by the 2007 Credit Crunch and 2008 Financial Crisis. In 2003, HSBC acquired the financial firm Household for £10 billion.^[3] The acquisition would eventually cost HSBC $10.6 million more due to Household's subprime lending practices.^[4] From 2007 to 2008, HSBC share price fell 48.72%. In response, HSBC has cut over 1,500 jobs and plans to cut 1,000 more.^[1] The bank competes against other U.K. banks such as Barclays (BCS), Lloyds Banking Group (LYG), and Royal Bank of Scotland (RBS-LN), U.S. banks such as J P Morgan Chase (JPM) and global rivals such as Citigroup (C) and Banco Santander (STD).^[2]

Business Financials

HSBC Holdings operates in four main business segments:

Personal Financial Services (60.0% of Net Interest Income)

Personal Financial Services provides savings accounts, mortgages, personal loans, and credit cards to over 105 million consumers in 62 countries. Within this segment is the HSBC Premier banking service, which offers 24-hour priority telephone access and free international funds transfer between HSBC accounts. From 2007 to 2008, Personal Financial Services net interest income increased 1.2%.^[2]

Commercial Banking (19.3% of Net Interest Income)

The Commercial Banking segment offers banking products to corporate, mid-market, small, and micro businesses. These products include financing, cash management, international trade, and investment banking. At the end of 2008, this segment had $236 million in customer account balances. From 2007 to 2008, Commercial Banking net interest income increased 4.8%.^[2]

Global Banking & Markets (17.4% of Net Interest Income)

The Global Banking & Markets segment offers financial products to major government, corporate, and institutional clients worldwide. These products include foreign exchange, currency and interest rate derivatives, and private equity managers. From 2007 to 2008, Global Banking & Markets net interest income increased 92.8%.^[2]

Private Banking (3.3% of Net Interest Income)

The Private Banking segment offers trustee services to high net worth individuals. These services include cash management, clearing, wealth management, and inheritance planning. At the end of 2008, this segment held $352 billion in client assets. From 2007 to 2008, Private Banking net interest income increased 32.6%.^[2]

HBC pre-tax profit decreased significantly from 2007 to 2008, as a result of the bank holding non-performing assets.‎^[2]

Trends and Forces

HSBC crushed by 2007 Credit Crunch and 2008 Financial Crisis

HSBC, like other European banks, was hit hard by rough market conditions in the past two years. From from 06/06/08 to 06/06/09, the bank's share price dropped 48.72% (which was on the lower-end for the top European banks. Only Barclays (BCS) had share prices drop less at 29.75%). Non-performing "toxic" assets, Mortgage-Backed Securities (MBS), and credit defaults all plagued the bank and rotted their balance sheets.

A primary driver of HSBC's 2007/2008 hardship was its 2003 acquisition of Household, a mortgage and finance business.^[3] Chairman Stephen Green admitted that the bank "wish they hadn't acquired" Household, especially for the £10 billion price tag.^[5] Household practiced subprime lending, which gave HSBC over $10 million in non-performing loans.

HSBC cuts jobs, issues rights to raise capital.

HBC cut 1,100 jobs in September, 500 in November, and 1,000 in December^[6] The bank has cut 6,000 jobs in 2009, so far.^[7] Comparatively, U.K. banking rival Barclays (BCS) has cut 4,500 jobs in 2008^[6] as well as 2,100 in 2009.^[8] HSBC, unlike other U.K. bank competitors Royal Bank of Scotland (RBS-LN) and Lloyds Banking Group (LYG), has not received capital injections from the U.K. government.^[6]

Also, the bank announced a $17.7 billion rights issue in the beginning of March.^[5] A rights issue allows existing shareholders to purchase additional securities at a discounted price.^[1] From 2007 to 2008, HSBC's net profit dropped 62% to $9.3 billion and its Tier 1 Capital Ratio dropped from 9.3% to 8.3%. HSBC hoped the rights issue would increase the ratio to 9.8%.^[5] The rights issuance profited HSBC well, as shareholders bought an astounding 97% of the stock on sale.^[9] This success has allowed HSBC to avoid needing government capital, unlike its competitors Royal Bank of Scotland (RBS-LN) and Lloyds Banking Group (LYG), giving investors more confidence in HSBC. HSBC also sold the remaining 3% ($172.7 million) to investors.^[9] As planned, the rights issue increased HSBC's Tier 1 Capital Ratio to the target value of 9.8%.^[9]

U.K. Banks have been Hit just as Hard as U.S. Banks.

It is common knowledge that U.S. banks, such as Bank of America (BAC), Citigroup (C), and Lehman Brothers (LEH), have suffered billions in losses due to the 2008 Financial Crisis. U.K. banks have not been immune to the U.S. crisis, as the U.K. government has invested €781.2 billion, compared to ~ €9.1 trillion ($12.8 trillion) invested by the U.S. government.^[10] U.K. banks have U.S. commercial real estate exposures -- in the form of loans and other debt mortgage-backed securities (MBS).^[11] So hardships in the U.S. housing market and banks suffering losses due to subprime lending in turn causes foreign banks to suffer losses.

Some analysts suspect that the U.K. is doomed for a recession in 2009.^[12] The U.K. government is on pace to lend over £1 trillion to bailout banks in 2009, which it hopes will boost lending, but may just cause a bigger debt.^[12] U.K. GDP has decreased 33% since the end of 2007.^[12] U.K. unemployment reached 1.54 million in May.^[13] The Confederation of British Industry predicts that U.K. unemployment will peak at 3.03 million (9.6% of U.K. population) by Q310^[13] On top of all that, the U.K. housing market has been miserable -- as mortgages to home buyers dropped 49% since the beginning of 2008^[12] and housing prices have fallen 20% in that time span.^[14]

Competition

• Barclays (BCS) -- London-based BCS is the top UK bank rival to HBC.^[15]
• Royal Bank of Scotland (RBS-LN) -- RBS is also based in the U.K. and is considered one of the world's safest banks. Like HSBC, RBS offers both retail and commercial banking products.^[16]
• Lloyds Banking Group (LYG) -- LYG is another U.K bank that competes with HSBC for customers in the Retail and Commercial Banking businesses.^[17]
• Citigroup (C) -- Citigroup offers similar banking products as BCS, and has lost money in five straight quarters.^[18]
• Bank of America (BAC) -- BAC is a bank holding company that competes with BCS for U.S. consumers.^[19]
• J P Morgan Chase (JPM) -- Like BAC, JPM also offers credit provision and investment banking products while competing with BCS for U.S. consumers.^[20]

• Note: BCS, LYG, and RBS financials are given in £. For purposes of comparison, the BCS, LYG, and RBS data in this table was translated to USD using the average USD/GBP exchange rate for 2008 (1.85251) USD/GDP).^[27]

References

1. ↑ ^{1.0 1.1 1.2} Investopedia, "Rights Offering"
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7} HSBC 2007 Annual Report
3. ↑ ^{3.0 3.1} Forbes, "HSBC Pays for its Mistakes," 03/02/09
4. ↑ The Independent, "HSBC rues Household deal as it raises £12.5bn," 03/03/09
5. ↑ ^{5.0 5.1 5.2} Forbes, "AIG,HSBC Leave Europe Scarred," 03/02/09
6. ↑ ^{6.0 6.1 6.2} Bloomberg, "HSBC Said to Plan 1,000 Job Cuts, May Close Offices," 03/25/09
7. ↑ UPI,"HSBC to cut jobs and raise $18 billion," 03/02/09
8. ↑ New York Times, "Barclays plans to cut another 2,100 jobs," 01/14/09
9. ↑ ^{9.0 9.1 9.2} Bloomberg, "HSBC Finds Buyers for 97% of Record Rights Offering," 04/06/09
10. ↑ Seeking Alpha, "These European Nations Are in Worse Shape than the U.S.," 06/15/09
11. ↑ Seeking Alpha, "Second Stress Wave for European Banks," 04/23/09
12. ↑ ^{12.0 12.1 12.2 12.3} Seeking Alpha, "Is U.K. Headed for an Even Worse Great Depression? (Part 1 of 3)," 02/18/09
13. ↑ ^{13.0 13.1} Bloomberg, "U.K. Unemployment Rises Less Than Economists Forecast," 06/17/09
14. ↑ Seeking Alpha, "U.K. Housing Still a Risky Buy," 06/21/09
15. ↑ Barclays 2008 Annual Report
16. ↑ RBS Website, "Financial Results"
17. ↑ LYG website, "About Us"
18. ↑ Citigroup website, "About"
19. ↑ Bank of America website, "About"
20. ↑ J.P. Morgan website, "About Us"
21. ↑ Barclays 2007 Annual Report
22. ↑ Citigroup 2007 Annual Report
23. ↑ BAC 2007 10-k, Item 6: Selected Financial Data
24. ↑ JPM 2007 10-k, Item 6: Selected Financial Data, page 14
25. ↑ Reuters, Financial Statements, "LYG"
26. ↑ Reuters, Financial Statements, "RBS"
27. ↑ USD/GDP Exchange Rates