HSBC May Sell $17 Billion of Shares to Boost Capital

March 2 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank by market value, may raise about 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 Feb. 28 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.

“The share sale could eliminate market concerns about the bank’s capital problem,” said Lee Yuk-kei, Hong Kong-based analyst at Core Pacific-Yamaichi International Ltd.

HSBC’s shares will be suspended from trading in Hong Kong, it said in a statement filed to the city’s stock exchange today. Richard Lindsay, a London-based spokesman for the bank, declined to comment on the capital-raising plans.

HSBC plans to announce a two-for-five rights issue, priced at about 300 pence a share, almost 40 percent below the stock’s closing price of 491.25 pence in London on Feb. 27, the Sunday Telegraph reported yesterday, citing unidentified people close to the company.

Tier 1 Ratio

The bank’s Tier 1 capital ratio -- a measure of financial strength -- will rise to 10.5 percent after the rights offer, the Sunday Times reported yesterday, without citing anyone.

HSBC is also expected to announce plans to shrink its U.S. consumer finance operations, the Financial Times reported, citing people familiar with the issue. It plans to scale back its U.S. credit-card and mortgage lending unit and will close its consumer subprime lending to new business, the newspaper said.

The share sale will probably be announced when the company releases second-half results at 8:30 a.m. London time today, 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.

The offering likely will set a U.K. record for a rights offer funded by private investors, surpassing Royal Bank of Scotland’s 12.3 billion-pound sale last June.

Bad-Loan Provisions

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 suffering somewhat by comparison as others around them build up capital,” said Mamoun Tazi, an analyst at MF Global Securities Ltd. in London with a “buy” rating on the stock.

HSBC’s Tier 1 capital ratio 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 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.

Declined 32 Percent

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 the median estimate of 10 analysts in a Bloomberg News survey. Bad-loan provisions likely increased 20 percent to $13.1 billion, according to the median estimate of five analysts.

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.