By Steve Slater
LONDON (Reuters) - HSBC Holdings is likely to halve its dividend and may need to raise up to $30 billion in a rights issue, according to leading analysts, sending shares in Europe's biggest bank to a seven-year low.
Morgan Stanley slashed its earnings forecasts for HSBC for this year and next, and said its relative capital position is not as strong as in the past.
"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," Morgan Stanley analysts Anil Agarwal and Michael Helsby said in a note.
By 5:35 a.m. EST HSBC's London-listed shares were down 8.4 percent at 586 pence, after hitting 581.5p, their lowest level since September 2001. Its Hong Kong shares closed down 4.1 percent at HK$70.
The DJ Stoxx Europe bank sector was down 5 percent as the capital worries, a profit warning from Deutsche Bank and big job cuts highlighted the problems facing the industry.
HSBC has easily outperformed rivals in the past year as unlike most big banks it has not had to raise capital, due to its historically strong capital and liquidity. But it is facing increasing scrutiny over any potential need to raise funds as the economy worsens.
"Historically, HSBC has carried about 120 basis points of surplus capital at the group level - this has now all but gone at a time when we think it better for the buffer to have increased," Agarwal said in the note.
"We believe HSBC is highly likely to cut the dividend in 2009, and in our bear case we now pencil in a 20 billion pounds ($29.2 billion) rights issue."
HSBC paid out about $10.1 billion in dividends in 2007.
HSBC's tier 1 capital was 8.9 percent at the end of September, above the European average. Its core tier 1 ratio stood at 7.5 percent at the end of June.
HSBC declined to comment on the research note, but in the past it has said it is comfortable with its capital position and its high cash generation, strong liquidity and funding keeps its capital well topped up.
Some analysts expect it to only raise capital if it takes advantage of problems elsewhere and makes an acquisition.
EARNINGS PRESSURE
Morgan Stanley estimated HSBC had injected about $11 billion of equity into its subsidiaries last year, and said its core capital ratio included about $15 billion of available-for-sale reserve, which most European and Asian banks are not allowed.
Others analysts have also said HSBC needs to raise capital to restore its advantage over rivals.
Citigroup, Santander, Royal Bank of Scotland, Barclays and many others have taken state rescue funds or raised cash privately to rebuild balance sheets.
Agarwal cut his HSBC 2009 earnings per share forecast by 39 percent to 55 cents, down from an estimated 90 cents for 2008, and cut its 2010 forecast by a third to 50 cents.
HSBC faces structural and cyclical headwinds from lower interest rates, higher bad debts and unfavorable foreign exchange moves, he said, predicting weaker revenue in the United States, Britain and Asia as a global recession takes hold.
"If HSBC cut its dividend by half its dividend yield will fall to 5 percent from 10 percent and given the bank's huge exposure to the UK and U.S. market, 5 percent yield is not attractive anymore," said Steven Leung, director with UOB Kay Hian in Hong Kong.
HSBC's earnings are not expected to recover until 2011 at the earliest, Morgan Stanley said.
($1=.6841 Pound)
(Additional reporting by Parvathy Ullatil in Hong Kong; Editing by Simon Jessop and Jon Loades-Carter)
