Market Report: HSBC hit as 'safe haven' status is questioned

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The Independent Online

The banking giant HSBC was on the back foot again last night as speculation about its capital base refused to go away. The banking giant retreated to 625.25p – down 6.96 per cent or 46.75p – amid persistent concerns that it might have to fall in line with its peers and raise capital or, alternatively, reduce its dividend to conserve cash.

In a note to clients, Cazenove said the bank's status as a "safe haven" was at risk as rivals bolster their capital ratios and loan impairments rise as the global economic slowdown gathers pace. HSBC is also at risk from a strengthening dollar, with the broker estimating that the imperfect hedging may have reduced the group's equity tier one ratio by 5 basis points in the second half of 2008.

"At the current share price, we estimate a 10 per cent placing would add [around] 100 basis points to capital rations and be accretive to [net tangible asset values]," Cazenove said, adding: "Alternatively, we estimate cutting the dividend by 50 per cent would save a cumulative 91 basis points of regulatory capital over the [2009-2011 period]."

Overall, it was another uneventful day on the London market with thin volumes and little trading activity. The FTSE 100 closed up 6.47 points at 4,330.66, while the FTSE 250 climbed to 6,3091.57, up 83.9 points.

The collapse of the British Airways-Qantas merger talks was one of the main talking points of the day. Traders said that, in the absence of a three-way merger, calling off the talks made sense for BA, up 0.5p at 172.5p, as the deal with Iberia is likely to deliver more synergies.

Parts of the mining sector fell back as investors moved to bank profits from recent gains. Antofagasta, down 5.76 per cent or 25.75p at 421.25p, was the hardest hit after Société Générale switched its stance on the stock from "hold" to "sell".

Elsewhere, the private equity group 3i continued its recovery. It climbed 3.11 per cent or 8p to 265.5p, after Merrill Lynch weighed in on the recent capital and debt concerns with some words of support, saying that the valuation was now "beyond anomalous". The broker said: "While in current conditions 'never-say-never' is a good motto, we can see no reason why 3i should be forced to raise equity. We have looked at gearing, regulatory capital and, importantly, available cash and found no reasons why we should be concerned."

Wood Group was firm, gaining 1.7p to 200.5p, after Morgan Stanley moved the stock to "overweight" from "equal weight", saying that the risk-reward trade-off in the stock was now looking attractive. "The outlook for the European oil service industry has deteriorated in recent months. However, long-term prospects look healthier given the challenges on the supply side of the oil industry. Against that backdrop, we believe it is worth building/maintaining positions in selected oil service companies," the broker said, sticking to its 340p target price for the stock.

The household goods giant Reckitt Benckiser drew strength from a Deut-sche Bank note, rising almost 4 per cent, or 98p, to 2,608p. Analyst Harold Thomson said concerns about the impact of a revival at its rival Unilever were misplaced. "One of Reckitt's main management skills is to spot opportune trends and make profit from this. This attribute explains in large part why Reckitt is unlikely to suffer from a Unilever revival and supports out positive share stance," he said, reiterating his "buy" rating.

On the downside, the specialist distribution group Bunzl was down 4.54 per cent, or 27p, at 567.5p after Goldman Sachs added the stock to its widely followed "conviction sell" list in a new support services review. The broker said it saw limited prospects for any merger or acquisition activity around Bunzl and anticipated a "tangible slowing of growth in 2009".

On the second tier, Goldman boosted Regus, the workspace solutions group that was up 3 per cent, or 1p, at 51.5p after the broker reiterated its "conviction buy" rating, arguing: "We believe Regus (unjustifiably) discounts a protracted structural decline in end-markets."

Among smaller companies, Blue Oar was up 15.38 per cent, or 1.5p, at 11.25p after positing a defence document telling shareholders to ignore the unsolicited hostile offer from Evolve Capital, calling it "derisory, opportunistic and wholly inadequate".

Evolve, down 5.26 per cent or 0.5p at 9p, soon fought back, saying that "if Blue Oar shareholders really want to invest in building a high-cost investment bank which has been haemorrhaging cash, they should indeed reject the offer".

The first closing date for the offer is 1 pm on 30 December.