The media also mentioned that HSBC will make Pound17bn (US$24.3bn) total provision for the Group in 2008 (similar to our forecast of US$23.7bn). It is also said about two-third of the provision charge (i.e. US$16bn) is expected to come from HSBC Finance (formerly Household International), which is similar to our forecast of US$15.3bn. In addition, HSBC is said to make Pound7bn (US$10bn) goodwill write-off on HSBC Finance and that large parts of HSBC Finance's operations will be closed and almost all the value attributed to the business will be wiped out. The sources also said HSBC will cut its DPS by 30% (not mentioned about if 2008 and/or 2009), compared with our forecasts of 28% y-o-y decline in DPS to US$0.65/share for 2008 and 17% y-o-y decline in DPS to US$0.54/share for 2009.
Assuming the above details are correct, we estimate that the rights issue will be earnings and book value dilutive. BVPS (Dec-09F) will be reduced by 20% to HK$69.80/share from HK$86.80/share while its EPS for 2009 will also be decreased by c. 20% to HK$4.64/share from HK$5.98/share. Its tier I CAR (Dec-09F) will be raised to 10.2% from 8.9%. This will put HSBC's tier I CAR at the higher end of global bank peers (ranging from 7.3-11.9%) from the middle of global bank peers' range.
We believe the rights issue will remove the short-term overhang about the rights issue concern by investors. While the rights issue can strengthen its capital positions, we believe HSBC's earnings outlook remains uncertain and earnings visibility remains low. Not only earnings from developed countries are slowing down but also the earnings momentum of emerging markets are seeing challenges ahead. With more banks peers being nationalized or injected capital from governments, privately owned banks like HSBC may still be marginalized although it strengthens its capital base. Moreover, HSBC is difficult to be re-rated, given its P/B is already at decent premium to peers (57% to UK banks, 30% premium to US banks and 55% to European). HSBC's share price will continue to be dragged by their weak price performances of those global banking peers on deepening of the financial tsunami and the looming risks in Eastern Europe.
Subject to further details of the rights issue and 2008 results, we temporarily peg our 2009 target P/B at 0.75x which translates into a 12-month target price of only HK$52.30/share (original: HK$60.00). Hence, we believe there may be some "short-term" rise in HSBC's share price on covering of short positions by some investors while the overhang about rights issue is removed. However, after the "short-term" rise, HSBC's share price may still be under pressure.
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