Tuesday, 20 January 2009

HSBC and its China bank stakes

HSBC is in trouble. Its share price is down from over 800p in October 2008 to around 500p today with a market capitalisation of around £60.8bn.

The cause of a lot of its current problems was the disastrous purchase HFC - a US sub-prime lender that has sucked in cash (billions) and shows little sign of surviving. Despite this HSBC is clinging on to this investment.

It appears to have a similar attitude to its Chinese investments in Bank of Communications and insurer Ping An.

This is commendable and I suspect this is a good long term strategy. Indeed I would argue that HSBC should offload its US assets and buy more in China at current prices.

The decision by HSBC to keep the faith in its Chinese assets led to the following quote from a Bank of China spokesman. This blog post is inspired by this quote:

"We will not forget partners who sent charcoal in snowy weather and those who extracted the firewood from under the cauldron".

To get "cauldron" into a modern business paper such as the FT is impressive. I just have to work out which role HSBC is playing in relation to this quote. One imagines that they are pleased with HSBC for staying put and not selling off existing Chinese assets.

For now I think this is the right decision.

HSBC’s dead leg [FT]

HSBC dares to be different. Selling stakes in Shanghai-based Bank of Communications or insurer Ping An, currently registering almost $10bn of unrealised gains, could go a long way to resolving nagging doubts as to the bank’s capital adequacy. But the bank is staying put, to the delight of one lyrical Bank of China spokesman: “We will not forget partners who sent us charcoal in snowy weather and those who extracted the firewood from under the cauldron.”

The principled stance is commendable. But HSBC’s show of faith in China underlines the incongruity of its continued commitment to HFC, its US consumer finance business. The recent refurbishment of HFC’s Illinois headquarters – kitted out in the group livery – suggests that management is in no mood to sever ties with a business it bought six years ago.

Why not? This is what normally happens when investments turn out to be stinkers. HFC will have racked up losses of over $13bn by the end of next year – on top of the $15bn purchase price and $4.4bn of capital injections so far, Goldman Sachs estimates. More capital is probably on the way to pay down HFC debt, and cover realised losses as mortgage customers mail HSBC their housekeys. Whether HSBC needs more capital at the group level is the wrong question. What matters is that this dead leg has dragged it into the mire. HSBC’s share price has fallen by a quarter in the last month, almost rubbing out its premium to the sector. Knight Vinke, the dogged shareholder activist, says that most of the radical options for HFC – walking away, a debt restructuring, a spin-off with equity dowry – have been dismissed by management on the basis of a recovery in 2009, now unlikely, and by reference to the potential, but far from certain, danger of doing serious damage to the bank’s reputation. Management needs to come up with more compelling reasons for continuing to shovel in capital.


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