HSBC Holdings PLC ratings (HSBC; AA-/Negative/A-1+) are unchanged, states Standard & Poor’s.
HSBC reported a pretax profit of $9.3 billion for 2008. S&P notes that this figure includes a number of significant items, most notably the write-off of all $10.6 billion of goodwill relating to the North American Personal Financial Services business, a $6.6 billion gain on own credit, and $5.4 billion of write-downs on illiquid trading assets.
As expected, given current market conditions, the underlying result was lower than in 2007. HSBC’s performance reflects its exceptional diversification, with strong earnings in Asia-Pacific and the Middle East partly offsetting a significantly higher impairment charge driven by the U.S. retail business.
Alongside a dividend cut, the fully-underwritten rights issue, which is the largest ever in the U.K., should bolster HSBC’s balance sheet and reinforce its capital levels compared with those currently reported by banks that have received government support.
It should also put HSBC in a stronger position to expand organically and take advantage of acquisition opportunities that may arise. Although subject to shareholder approval, we calculate that the rights issue will add 150 basis points to HSBC’s 7.0% core Tier 1 ratio and 8.3% Tier 1 ratio at year-end 2008.
This partly mitigates, we believe, the risk of a sharp increase in impairment losses on loans and available-for-sale (AFS) securities. The equity reserve in respect of the latter was reported as negative $20.6 billion at year-end 2008 and is excluded from the regulatory capital calculation. HSBC’s stress tests indicate that future impairments on AFS asset-backed securities might reach $2.5 billion from 2009 onwards, with cash losses of up to $800 million.
The negative outlook reflects S&Ps expectation that HSBC’s earnings and balance sheet will face greater pressure in 2009 as economic growth slows across all regions.
Also S&P expects HSBC to remain capital generative in 2009 which, in combination with its strong funding and liquidity and robust capitalization, is a key rating strength in the current economic and market environment.
L.D.