Banking & Finance

The $6.1 billion question

Analysts think HSBC will invest in Bank of Communications rights issue

Geoghegan: on the spot

Michael Geoghegan only moved to Hong Kong in January, but based on his frequent references to the Chinese economy at this week’s annual results, it looks like he is already halfway to becoming an ‘old China hand’.

Saying he was proud that HSBC was the leading international bank in China, Geoghegan noted that Chinese shopping malls were full and made sanguine remarks about the country’s property market: “Some talk about asset bubbles, but I believe this could be overblown not least because of the high proportion of cash buyers of property and the conservative loan to value ratios.”

He even added a bullish note about the direction of Chinese government policy: “The investments China is making in infrastructure and welfare will lead to higher domestic consumption and a healthy rebalancing of the economy.”

Accordingly, HSBC is putting more flags on the Chinese map: Geoghegan promised the bank would soon add its hundredth outlet.

That wasn’t the only commitment he emphasised. HSBC was founded in China in 1865 and he noted it had gone through the current crisis without selling any of its stakes in Chinese financial institutions. HSBC invested $4.5 billion in Ping An and Bank of Communications (respectively in 2002 and 2005) and he said those stakes market value is around $25 billion.

HSBC looks likely to be the first international company to list its shares in Shanghai – probably later this year – and Geoghegan believes its steadfast attitude marked it out among its global banking peers. “Our continued commitment stands in contrast to other banks who sold down their stakes for short term gain,” he said.

This all suggests – as Reuters, Bloomberg and analysts have speculated – that HSBC will take up its full allocation when Bank of Communications launches its forthcoming $6.1 billion rights offering – which means the bank will spend $1.1 billion to maintain its 18.6% stake.

“They have a strong relationship with BoCom. They are comfortable with it. I would expect them to get involved,” reckons Simon Maughan, an analyst with MF Global.

BoCom’s planned offering will see its capital adequacy ratio boosted by almost 3%. It needs the top-up after last year’s surge in lending. BoCom officials told Reuters that the rights issue was necessary to support the bank’s growth over the next three years.

BoCom is not alone. Bank of China has plans to sell Rmb40 billion of convertible bonds and raise new equity in Hong Kong; likewise China Merchants Bank is about to issue $3.2 billion of new equity in a rights offering. The Financial Times says analysts forecast that Chinese banks will raise at least Rmb270 billion ($39.5 billion) of new capital this year and next.

The new money is required to shore up capital bases after Chinese banks lent a record Rmb9.59 trillion last year to support the $586 billion government stimulus package. The regulator, the CBRC, worries that many of these loans could go bad (see page 7).

To further cool loan growth it has raised the reserve ratio twice this year – the move is estimated to have drained Rmb600 billion of liquidity from the banking sector.


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