HSBC Plunges After Rights Issue, Dividend Cut

HSBC shares were hit hard in early trading Tuesday, but closed just 0.4 percent lower, after the UK lender launched a $17.7 billion rights issue at a deep discount and slashed its annual dividend as bad debts rose in its U.S. consumer business.

Kirsty Wigglesworth / AP An HSBC sign is shown at a branch in London.

"Even though the capital raising and dividend cut have been much anticipated with the stock down 30 percent year to date, we still feel that the near term risk is to the downside given weakening fundamentals outside the North American operations," said analysts with Credit Suisse.

Also on Monday, HSBC cut its dividend for the full year by 29 percent to $0.64 and said it would close its troubled U.S. consumer loans business.

"HSBC is the only UK bank to pay a final 2008 dividend in cash and should be recognized for this," said Deutsche Bank analysts Jason Napier and Andrew Hill. "However, we expect some disappointment by yield-driven investors who had, like us, expected a higher dividend from the company."

Deutsche Bank cut its target price on HSBC's London-listed stock by 32 percent to 345p while slashing its earnings estimate for 2009 by 59 percent.

In the Asian afternoon session, the Hong Kong stock was down 17.2 percent at HK$47.10 after opening at HK$45.90, its lowest level since the Asian financial crisis of 1998, matching a similar slide in the bank's London-listed scrip on Monday after the earnings and capital raising announcement.

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The stock, which was suspended in Hong Kong on Monday, ended last week at HK$56.95 while the rights issue for Hong Kong shareholders was priced at HK$28, a 50.8 percent discount to its last traded price before the issue was announced.

Local brokers have deemed the rights issue "cheap enough" and a "sure way to win over shareholders" and expect a warm reception for the capital raising exercise in Hong Kong.

The stock has shed more than half its market value since Lehman Bothers collapsed in September 2008 but has still managed to outperform peers owing to its traditional balance sheet strength.

"HSBC is not cheap relative to other banks," said Alex Potter, an analyst with Collins Stewart.

"However, it is also not easily comparable, with stronger capital, greater diversity and better funding. These are rare qualities for a bank and we remain long-term buyers of the stock, but see short-term weakness," he said.

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