Jeremy Warner: HSBC scotches rights issue rumours

Outlook Does HSBC need to have a rights issue or find alternative ways of raising new capital? The company was busy pooh-poohing all such speculation yesterday after a broker in the Far East published a circular suggesting that HSBC might need to raise as much as $15bn.

On the basis that countless banks have gone through the same process of denial only to find themselves a few months later forced to come cap in hand to the capital markets, you would say that HSBC's rebuttal makes it a virtual certainty.

Yet this is not a terribly scientific way of assessing the likelihood of capital raising, so does HSBC actually need a rights issue? Despite being the bank that originally alerted the world to America's sub-prime crisis with some massive out-of-the-blue write-offs, HSBC has like some great super-tanker managed to steam through the banking crisis relatively unscathed. Well funded from its own deposits, there is no obvious requirement for new capital.

Collins Stewart estimates HSBC's core equity tier 1 ratio to be 8.3 per cent by end-2008. This compares favourably with 7 per cent at Royal Bank of Scotland, 7.3 per cent for Barclays and 6.6 per cent for Lloyds Banking Group. All these banks have already had at least one bite at the recapitalisation process (some of them several) and yet still they are not as strongly capitalised as the mighty HSBC.

Yet obviously there are risks. HSBC may be thought of as an emerging-markets bank, and indeed this is where the bulk of its deposits come from, but the larger part of its lending is to the mature markets of the US and Europe, where bad debt experience is likely to accelerate markedly over the next two years.

If HSBC does end up having to raise new capital, a rights issue may be its only option. Alternative capital-raising routes are fast closing up. Deutsche Bank effectively closed another of them yesterday by refusing to redeem €1bn of subordinated bonds and instead rolling them over. This was thought such an affront to precedent it may be the market in subordinated bank capital will close up shop altogether.

With the decline in the oil price, the sovereign wealth funds are also fast losing their appetite for Western banking equity. HSBC may yet find itself having to eat humble pie by launching a rights issue. It all depends on just how bad the economic contraction gets.