HSBC’s near-unparalleled strength in the face of the
tornadoes blowing through global financial markets has been
re-emphasised with a swift, internally funded £750 million ($1.3
billion) recapitalisation of its UK business. The move came at a
time when most of its rivals in the UK – and the world – have been
forced to turn to governments to underwrite rights issues and
inject capital.

Funds: deposits as a percentage of loans and advancesAn HSBC spokesman said its
recapitalisation “fulfilled its agreed commitment to the UK
government’s banking sector scheme”, which gives it access to
central funding, even though it has been a recent provider of
liquidity in the interbank market. In the three days prior to the
government’s announcement on 8 October, HSBC loaned around £4
billion in three- and six-month money to other banks.

In the UK, Royal Bank of Scotland (RBS), Halifax-Bank of
Scotland (HBOS) and Lloyds TSB have been forced to turn to the
government to subscribe to a combined £9 billion in preference
shares. The government is also underwriting a total of £28 billion
in capital raising for the three banks, which will result in it
owning substantial stakes in all of them in a quasi-nationalisation
of most of the UK banking industry.

More deposits than loans

HSBC’s retail funding strategy is highly conservative compared
to its peers. It holds more customer deposits than loans on its
balance sheet, with $1.05 trillion in loans and $1.16 trillion in
deposits, partly because of its good exposure to emerging markets,
where there is still enough margin to take in deposits, invest in
government securities and make a profit. The figure is
substantially lower, however, than it was before HSBC bought
Household in the US in 2003, a consumer lending business with
assets funded mainly through money markets.

Derek Chambers, from Standard & Poor’s Equity Research, told
RBI: “If you had similar levels of deposits-to-loans in
more developed countries, you would not make much money. There
isn’t the margin in intermediation any more. That process went on
for a long time and to some extent it was a good thing, but it has
led to over-leverage and now we are in the process of reversing
some of that.”

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Moreover, the strong funding position has thrown up some issues
for the bank – other institutions have pushed the excess liquidity,
and therefore the risk, to HSBC, which has then had to place the
funds in the market, according to CEO Michael Geoghegan. The bank
pays just 0.01 percent on overnight deposits in Hong Kong, for
example, because it has to be careful of the liquidity it
attracts.

HSBC’s conservative funding stance is also likely to be one of
the reasons the bank has one of the lowest profit margins per
retail banking customer of 25 European banks in a recent
RBI survey (see RBI 597).

Opportunistic acquisitions profitability

While it is hard to say any bank in the US or Europe has
survived the credit market freeze unscathed, there are a few others
which have used the downturn to extend their franchises. BNP
Paribas’s opportunistic acquisition of Fortis and Santander’s moves
in the US, Europe and the UK have been rare examples of banks being
able to use capital strength to invest for the long haul. Santander
in particular, which has retail banking at its core, has managed to
maintain earnings growth in every quarter through the turmoil,
although that will be severely tested next year.

Weaker rivals, meanwhile, face the prospect of governments
taking stakes in their businesses as they desperately try to bring
stability back to national financial systems. The UK bail-out,
which set the tone for similar programmes in Europe and the US,
includes plans for the public recapitalisation of banks and the
introduction of extra liquidity by swapping assets for capital and
guaranteeing £250 billion of loans in the interbank lending market.
Royal Bank of Scotland, for instance, has had to raise £20 billion,
£15 billion through a capital raising underwritten by the UK
Treasury, and £5 billion in preference shares.

In contrast, HSBC Holdings, the parent of UK subsidiary HSBC
Bank and the world’s largest banking group by market
capitalisation, stands out from the pack. It transferred the
required capital the day after the UK government announcement of
the bail-out package, bringing its Tier 1 ratio up to 7.9 percent.
Spain’s Santander also recapitalised its Abbey and Alliance &
Leicester UK subsidiaries with a £1 billion injection. Barclays
announced it would also raise capital, but plans not to use
government assistance.

The major blot on HSBC’s copybook remains its acquisition of
Household, which cost $14.2 billion – then the second-largest
consumer finance business in the US behind Citi. It has been a
significant contributor to the bank’s $25.6 billion losses in loan
impairment charges over the last three quarters.

HSBC has decided to run off its US auto loans book, halting
origination, and is significantly reducing assets in the wider US
business to around $100 billion from the current $156.6 billion.
But it remains strongly committed to its $46.7-billion-asset US
cards portfolio because it gives the bank “industrial strength”,
allowing it to benefit from economies of scale across its global
card operations, according to chairman Stephen Green.