HSBC May Raise $17 Billion Selling New Stock to Bolster Capital

March 1 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank by market value, may raise as much as 12 billion pounds ($17 billion) to bolster capital as bad U.S. loans erode earnings, said two people with knowledge of the situation.

The bank will consider a rights offering, said the people, who declined to be identified because terms of the transaction haven’t been completed. The Financial Times reported yesterday that Goldman Sachs Group Inc. and JPMorgan Cazenove were hired to underwrite the sale.

Financial institutions in Europe, led by UBS AG and Royal Bank of Scotland Group Plc, have been forced to raise more than $355 billion because of credit market losses and investment writedowns, according to data compiled by Bloomberg. Higher capital levels would give London-based HSBC the ability to buy assets from cash-strapped rivals, the FT said.

“HSBC isn’t raising capital for fear of current losses, it is looking forward and putting itself in a very strong position beyond this crisis,” said Howard Wheeldon, senior strategist at BGC Partners in London. “It was widely expected that at some point HSBC would have to go along this road, and to do so through its own shareholders shows a positive attitude.”

Richard Lindsay, a London-based spokesman for the bank, declined to comment on the capital-raising plans.

The share sale will probably be announced tomorrow when the company releases second-half results, the FT said.

Capital Ratios

The offering likely will set a U.K. record for a rights offer funded by private investors, the newspaper said, surpassing Royal Bank of Scotland’s 12 billion-pound sale last April.

HSBC, unlike Royal Bank of Scotland, hasn’t been bailed out by the U.K. government. The company has, though, racked up $42.3 billion of bad-loan provisions since the start of 2006, chiefly at its U.S. unit. Banks and insurers worldwide have suffered more than $1.1 trillion of losses and writedowns amid the worst financial crisis since World War II.

“HSBC previously had one of the strongest capital ratios relative to other banks, yet it is now is suffering somewhat by comparison as others around them build up capital,” said Mamoun Tazi, an analyst at MF Global Securities Ltd. in London. “HSBC may be going to its shareholders sooner rather than later before more rights issues arrive and drain away investor cash.”

Dividend Cut?

HSBC’s Tier 1 capital ratio -- a measure of financial strength -- stood at 8.9 percent as of Sept. 30, near the top end of its 7.5 percent to 9.0 percent range. The company had a loan-to-deposit ratio of 88 percent then.

In a separate step to retain capital, the bank may be forced to cut its full-year dividend by as much as 50 percent according to Simon Willis, an analyst at NCB Stockbrokers Ltd. in London. Derek Chambers, an analyst at Standard & Poor’s Equity Research in London, expects a 20 percent cut in the dividend.

HSBC has declined 32 percent over the last year, valuing the bank at 59.7 billion pounds. The 65-member Bloomberg Europe Banks Index has dropped 68 percent in that period.

HSBC’s net income for the six months to Dec. 31 probably fell 29 percent to $5.85 billion, compared with $8.24 billion a year earlier, according to a median estimate of 10 analysts in a Bloomberg News survey. Bad-loan provisions likely increased 20 percent to $13.1 billion for London-based HSBC, according to a median estimate of five analysts.

Regional Estimates

The company bought subprime-mortgage lender Household International, renamed HSBC Finance, for $15.5 billion in 2003. The bank has reduced lending, fired managers and sold parts of the business to reduce provisions at the unit and control losses. It has rejected pressure from shareholder Knight Vinke Asset Management LLC to separate the operation.

In the second half, losses in North America likely widened to $3.59 billion from $2.34 billion, according to the five analysts surveyed, driven by consumer and corporate loan defaults. Profit in Europe probably rose 26 percent to $5.73 billion. Pretax profit in Hong Kong probably fell 24 percent to $3 billion, the analysts estimated. Earnings in the rest of Asia likely rose 4.6 percent to $2.79 billion, the analysts said.

HSBC is scheduled to report results at 8:30 a.m. London time tomorrow.