Mixed reception to HSBC's 'all is well' message

When HSBC's Asia-Pacific chief executive officer Sandy Flockhart sent out an invitation to a press conference at the bank's Hong Kong headquarters yesterday, no agenda was stated. However, it came as no surprise to the room full of journalists that the key topic was the recent volatility in HSBC's share price.

The stock took a dive last Monday (March 2) after HSBC announced a $17.7 billion rights issue. Shareholders are being offered five new ordinary shares for every 12 existing shares at a price of HK$28 ($3.61) per new share. The issue, which is being arranged by Goldman Sachs, HSBC Bank and JPMorgan Cazenove, opens for subscription on March 20. News of the fund-raising was not well-received by the market, however, and the shares lost 18.8% on the day of the announcement touching a 52-week low of around HK$43.

But that fall paled in comparison to the bloodbath that was to follow. On Monday the stock tumbled 24.1% in Hong Kong to a close at HK$33 -- the lowest level in over a decade. More than 40% of that drop came during the closing auction and sparked speculation about potential price manipulation. The fact that the shares recovered yesterday to close at HK$37.60 further reinforced such speculation.

Flockhart said the collapse in the share price on Monday was caused by some traders who are currently under investigation by regulators. He stressed that this was not panic selling, but rather a handful of small volume trades that destabilised the share price. He added that some choppy trading had been expected by the bank after the rights issue was announced.

"We are making money for our shareholders," emphasised Flockhart. In an aside he reminisced that in 1974, when he joined HSBC, the bank made a profit of HK$278 million, and he was working in Hong Kong when the profit crossed HK$1 billion -- he still remembers the cheer that went up across the bank's Queen's Road Central headquarters when it was announced. The bank has gone on growing and, in 2008, booked a HK$58 billion profit despite challenging market conditions.

"We are one of the financial institutions going through this storm and we will get through it," said Flockhart. He also suggested that Asia was better placed to withstand the crisis as companies in the region had emerged stronger after weathering the earlier Asian financial crisis.

In a gesture of goodwill for the city to which it owes its name and lineage, Flockhart also announced that the bank had decided to channel another HK$4 billion for lending to small- and medium-sized enterprises in Hong Kong. The first HK$4 billion that was earmarked for SMEs earlier is 80% allocated, Flockhart disclosed.

"Our underlying business remains profitable, we are not one of the many banks which has taken government support as we have loyal shareholders who will support us, and the new capital we are raising will position us strongly to emerge as one of the strongest banks operating globally," he impressed upon the gathered media.

Flockhart was asked whether HSBC owes an apology to shareholders who are booking large losses on their holdings and who have "broken hearts", but the Asia CEO skirted the issue and answered instead that: "The share prices of many banks have gone down more than HSBC."

Flockhart tried to instil confidence among the audience by saying that the rights issue was receiving a positive response from large shareholders and added that, irrespective of how many shareholders picked up their entitlement, the issue is fully underwritten and has the support of Hong Kong's largest tycoons.

FinanceAsia posed a question about how the credit losses at companies in the region, which analysts and rating agencies are predicting will be the next negative to impact HSBC's balance sheet, will play out. Flockhart replied that HSBC has always been a conservative institution and prides itself on knowing its customers well. He agreed that the slowdown in Asia will cause a rise in impairments but countered the question by saying that in January and February HSBC had weathered this quite well.

But Flockhart was keen to reinforce the script he had obviously been given and, somewhat tangentially, added that having a strong base of shareholders and being committed to paying dividends would help the bank withstand credit losses.

"The lion is still very much out there and has a big roar in its belly," Flockhart said. Indeed, animal analogies were the order of the day as he also compared the bank to an elephant turning on a thimble.

But despite Flockhart's recurring message that the bank was stable, strong, dividend-paying and well-capitalised, one final question summed up the mood of the gathering.

A gentleman introduced himself saying he was a representative of a local investor who has shares in HSBC. He said HSBC's recent actions, including not issuing a profit warning and claiming that it did not need to raise more capital just before it took a massive write-down on its US consumer finance business and announced the rights issue, had led people to believe that HSBC's trademark transparency was now lacking and that the bank should say sorry to local investors.

Flockhart's well-rehearsed and confidently delivered answers did not do much to alleviate the scepticism felt by many Hong Kong reporters who seemed to be in complete agreement with the questioner.