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A big sell-off of shares in Europe's biggest bank HSBC in Asia spilled over into London today, leaving the price nursing a loss of 53½p, or 8%, at 586½p, its lowest level since 9/11 and the attack on the World Trade Center in New York in 2001.
The big American broking house Morgan Stanley reckons the banking giant may soon have to turn to shareholders for extra funds of between $20 billion and $30 billion and halve the dividend.
The broker expects the bank's earnings to fall sharply this year with no prospect of recovery until 2011 at the earliest. Profits will be hit by falling and flattening yield curves, combined with the impact of the global recession and foreign exchange effects, and this will impair HSBC's dollar cash flow.
“Our detailed study of HSBC's capital and asset quality position reinforces our belief that it will have to halve the dividend and raise major capital in 2009.”
It also warns that HSBC's balance sheet is not as strong as most people might imagine. It has one of the weaker capital ratios in Europe and the second weakest in Asia. A detailed review of the subsidiary accounts shows that it has injected $11 billion worth of equity into subsidiaries during 2008.
HSBC was the first bank to make write-offs resulting from the collapse in the subprime lending market in February 2007, but has not, so far, gone to the Government to ask for extra funds.
The rest of the banks were also making heavy weather of it. There is every likelihood that some of them will need to return cap-in-hand to the Government later this year for a second round of funding which will result in them being fully nationalised. The full-year reporting season gets under way in a matter of weeks and should make interesting reading. Confirmation of more than 2000 job losses at its retail banking arm should have cheered Barclays, down 17.8p at 148.1p, but it didn't.
Gossip in the Square Mile claims it could be the first target for the stock-market bears when the short-selling ban expires on Friday. It has, so far, refused to approach the Government for any extra cash, relying instead on tapping sovereign wealth funds.
There were also losses for HBOS, down 8.2p at 72.8p, and merger partner Lloyds TSB, 11.9p to 121.1p. Standard Chartered, which raised money from shareholders towards the end of last year, fell 52½p to 782½p. Royal Bank of Scotland was left nursing a loss of 4.3p at 46.8p. Some institutional investors claim the true value of the shares may be just a penny in the event of further funding requests.
Meanwhile, the London stock market extended its losing streak to six consecutive days. The FTSE 100 index fell 153.8 to 4245.3 with losses among the banks accounting for around one third. It has fallen almost 400 points since last Wednesday, or 8.4%.
The gloomy trading update from Punch Taverns, down 14½p at 43¼p, took a toll on the other debt-laden pub chains. Enterprise Inns fell 10¼p to 51p with Marston's off 9¼p at 118½p, Greene King 31½p at 423¾p and JD Wetherspoon 14¼p at 294p.
UBS reckons 2009 will be a tough year for the oil industry and does not believe that the pricing environment for the sector is likely to improve before the second half of the year. As a result, investors are unlikely to have the appetite to pay for higher earnings until prospects become clearer. Its top picks are BP, 11p firmer at 504½p, and Wood Group, 10p lighter at 212½p.
Margins are under increasing pressure at Drax, Europe's biggest coal-fired power generator, which has prompted Morgan Stanley to repeat its sell rating and drop its target price to 495p. The Drax share price, down 39½p at 520p, has underperformed the rest of the sector by 22% since September and by 6% in absolute terms. The key driver to its profits is the dark green spread, the margin on coal plants, which has lost 20% during the past month. Morgan Stanley prefers to put its money in Scottish & Southern Energy, down 7p at 1200p, which last week raised almost £500 million to spend on acquisitions.
