HSBC finally admitted that its $15bn (£11bn) acquisition of the sub-prime lender Household was a mistake yesterday as it launched a £12.5bn UK record rights issue to shore up its balance sheet against future losses.
The bank had defended the deal publicly since the end of 2006 when rising mortgage defaults alerted the market to the oncoming sub-prime crisis. But with bad debts and writedowns in the US hitting $16.3bn last year, HSBC has written off $10.6bn for all the remaining goodwill of Household.
"With the benefit of hindsight, this is an acquisition we wish we had not undertaken," Stephen Green, HSBC's chairman, said.
Mr Green made the point that he was not running HSBC when the deal was agreed in late 2002. At that time, Sir John Bond dominated the bank as chairman, with Sir Keith Whitson as his chief executive.
"No, no ... I was not chief executive at the time. This was six years ago," Mr Green said. He added that the board, of which he was a member, went over the business case and "at the time it was a good business proposition".
Asked when he had decided Household was a mistake, Mr Green said the world had changed in the last six to eight months as unemployment in the US had risen faster than expected and the economy had contracted sharply.
Falling house prices had left Household's customers with no equity remaining in their homes to refinance debt – Household's main service.
HSBC predicted a tough market over the next 12 months, with unemployment rising and house prices falling in the US and Britain this year and next.
An HSBC shareholder said: "They have owned up to the fact that Household was a rubbish business. They have been in denial since they bought it. It is the reason they are raising the money they need today."
Michael Geoghegan, the chief executive, said HSBC would run off remaining real estate and unsecured lending assets of $62bn, close almost all Household's 800 branches and shed 6,100 jobs at a cost of $265m in the first half of this year.
The bank said that bad debts would "remain elevated", leading to losses at the business this year and next. With the business running off, borrowers may have little incentive to repay.
HSBC's rights issue beats Royal Bank of Scotland's previous record £12bn share sale last year. The fully underwritten issue will offer shareholders five new shares at 254p for every 12 they own now, a 47.5 per cent discount to Friday's closing price and 39 per cent below the theoretical ex-rights price.
HSBC shares fell nearly 19 per cent to 399p yesterday, leading the FTSE 100 down on another terrible day for financial stocks.
The bank also slashed its 2008 dividend to 64 cents from 90 cents and said it would pay three interim dividends of 8 cents a share for 2009.
The rights issue will boost the bank's capital ratio by about 1.5 percentage points. The core tier one ratio fell to 7 per cent at the end of 2008, below analysts' predictions, from 7.9 per cent at the end of September.
Mr Green said that unlike most other banks it was able to raise capital from existing investors rather than taking money from the Government or sovereign wealth funds. He insisted that HSBC was raising the funds from a position of strength and could use the extra capital to lend profitably.
Including the goodwill write-off for Household, HSBC's pre-tax profit fell 62 per cent to $9.3bn. Impaired loans and other credit risk charges jumped by $7.7bn to $24.9bn. The group was profitable in Asia, Latin America and Europe, but was laid low by a $15.5bn loss in North America.
Mr Geoghegan said HSBC had no intention of taking part in the UK Government's asset protection scheme [APS] and that HSBC would consider buying Asian assets that Royal Bank of Scotland was putting up for sale.
"It [the APS] is a good thing for people who need it, but HSBC doesn't need it," he said.
Doubts persisted about whether HSBC was raising enough cash. Knight Vinke, the bank's activist shareholder, argued that there was a glaring gap of $34bn between the carrying value and fair value of assets on Household's books. There was also a big jump to $21bn in available-for-sale securities that count towards capital. HSBC said it expected to lose only $600m to $800m on these holdings, and that the numbers were checked by the rights issue's underwriters.
"We welcome the rights issue, but the increase in the AFS reserve means that it will not put the capital debate to rest," analysts at KBW said.
Knight Vinke said the write-off of Household vindicated its campaign against the deal.
The Household deal brought initial protests from investors who were nervous about adding risky lending to HSBC's conservative business. But the bank said that it was buying top-notch risk systems cheaply that would allow it to lend out its glut of deposits and sell consumer finance in emerging markets.
After a couple of highly profitable years problems mounted and HSBC was forced to oust Household's management, who had been given control of HSBC's North American operations.
HSBC's executive directors did not take cash bonuses for 2008 or receive a performance share award. As a result, Mr Geoghegan's earnings fell from £3.54m in 2007 to £1.67m last year.
But the bank revealed that a non-director banker earned between £13.7m and £13.8m. Another earned between £11m and £11.1m. Three others earned between £3.3m and £2.6m.
The two top earners were said to be Tom Cole and Daniel Toscano, leveraged debt investment bankers hired from Deutsche Bank at the top of the market in September 2007.Reuse content