HSBC to Pull Back as Profit Is Crunched

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HSBC Holdings PLC unveiled plans to curtail its foray into U.S. consumer lending by pulling back from key businesses, a move that comes as the British bank prepares to raise billions of pounds to shore up capital and possibly hunt for acquisitions.

HSBC announced the moves Monday as it released 2008 results that were hurt by a dismal fourth quarter. HSBC posted full-year net profit of $5.73 billion, down 70% from $19.13 billion in 2007.

The bank said Monday it plans to raise £12.5 billion ($17.9 billion) by issuing new shares to existing shareholders via a so-called rights issue. The share issue will take place at 254 pence a share, a 47.5% discount to the closing price Friday, with every shareholder able to subscribe to five new shares for every 12 shares they already own.

HSBC shares closed down 19% at 399 pence in London on Monday.

Chief Financial Officer Douglas Flint said on a conference call that the bank had decided to raise the capital especially in light of the sharp deterioration in the markets in the fourth quarter.

HSBC Chairman Stephen Green said, "The current global economic slowdown, combined with extreme volatility in financial markets, means that the financial system remains under stress. We determined that HSBC should maintain its signature financial strength."

Mr. Green said the additional capital won't only allow the bank to weather the future downturn, but will give the bank "options with respect to opportunities which we believe will present themselves."

HSBC also announced a full-year dividend of 64 U.S. cents a share, a 29% decrease from 2007.

The bank said it will scale back its consumer-lending operations in the U.S., closing its HSBC Finance Corp. and Beneficial brands, causing a loss of 6,100 jobs. The company said its retail-bank-branch business in the U.S. won't be affected by this decision.

"With the benefit of hindsight, the group wishes that it hadn't made this investment," HSBC Chief Executive Michael Geoghegan said during the conference call. "But we are where we are, and we believe the majority of shareholders wish us to collect these assets...and then move on."

He said more pain is still to come from the U.S. consumer-finance unit before the assets are run down. "We do believe that over the next two years, provisioning will remain elevated, if unemployment continues to rise," he said.

HSBC reported a pretax loss of $15.5 billion for North America, hurt by a goodwill-impairment charge of $10.6 billion in its North American Personal Financial Services business. Excluding that write-down, HSBC reported an overall pretax profit for 2008 of $19.9 billion, a decline of 18% from 2007. The bank's actual pretax profit was $9.31 billion, down 62% from $24.21 billion in 2007.

Net interest income rose 13% to $42.56 billion from $37.8 billion.

HSBC's pretax profit in Asia, including the Middle East, was $11.9 billion in 2008, down 11% from what it reported for 2007. Profit in Hong Kong declined 26% to $5.46 billion, mainly reflecting lower wealth-management and insurance income and impairment charges on investments, arising from sharp falls in equity prices. In the rest of the region, underlying pretax profit increased 27% to $6.46 billion.

The move to raise capital via a rights issue is a sign that the survivors of the financial crisis may be angling, over the next 12 to 24 months, to buy discounted assets from weakened competitors. The moves also highlight a big change in how banks globally are retrenching in certain markets and expanding in others in what is creating a shift in how money will be deployed in the coming years.

The immense fallout in the global banking business is widening the gap between those who have recorded massive losses and received state aid, and those who haven't and who may be aiming to make acquisitions if asset pricing stabilizes.

HSBC plans to use the money to shore up its cushion. The bank's Tier 1 capital ratio -- a key measure of financial resilience -- fell to 8.3% in 2008 from 9.3% a year earlier, but it said the share issue would boost that to 9.8%

HSBC is focused on buying available assets in Asia if prices turn attractive in the next two years, according to a person familiar with the situation.

WSJ