HSBC Holdings – Letting A Good Crisis Go To Waste

Link REIT - Squeezing Every Last Drop of Blood

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Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*More Stringent US Stress Test Coming: While the largest US banks have already agreed to suspend share buybacks, Democrat lawmakers and consumer advocates have pushed for US banks to also suspend dividends and use their capital to help absorb the financial stresses of the COVID-19 Crisis.  Federal Reserve Board (FRB) Vice Chairman Randal Quarles indicated that the 2020 commercial bank stress test will include the COVID-19 pandemic event which would likely increase the stress capital buffer; *HSBC North America May Actually Be A Bottomless Pit: Given the negative pre-provision operating profit at HSBC North America (HSBCNA) coupled with an increasingly challenged balance sheet, HSBCNA’s capital needs cannot be completely discerned. However, in our attempts to do so, we find that HSBCNA will require a capital infusion of between USD 12.2 -14.3 bn – over the next 12 months to meet the current capital regime’s minimums plus buffers. If we extend this analysis to 24 months, HSBCNA will require between USD 17.2 – 19.3 bn – intimating a negative equity capital of USD 1.4 bn in Year 2 (prior to any regulatory fines that we’ve become accustomed to). To put this into perspective, if Year 2 is the base case, HSBC Holdings plc (5.HK/HSBA.LN) would need to raise between 18.0%-19.5% of its market-cap just for the US alone; and* Japan Readacross Is Not Positive On Two Fronts: There is a potential negative readacross to Japanese financials, as developed market financial sector regulators are likely to exhibit solidarity in encouraging capital return prudence. In addition to the challenges that the mega-banks will have under the new COVID-19 capital regime, so will they be challenged domestically. MUFG Americas (MUFGA) would appear to need between USD 4.6 – 6.2 bn to meet regulatory minimums plus buffers under the current capital regime – yet would remain solvent.

*More Stringent US Stress Test Coming: While the largest US banks have already agreed to suspend share buybacks, Democrat lawmakers and consumer advocates have pushed for US banks to also suspend dividends and use their capital to help absorb the financial stresses of the COVID-19 Crisis.  Federal Reserve Board (FRB) Vice Chairman Randal Quarles indicated that the 2020 commercial bank stress test will include the COVID-19 pandemic event which would likely increase the stress capital buffer; *HSBC North America May Actually Be A Bottomless Pit: Given the negative pre-provision operating profit at HSBC North America (HSBCNA) coupled with an increasingly challenged balance sheet, HSBCNA’s capital needs cannot be completely discerned. However, in our attempts to do so, we find that HSBCNA will require a capital infusion of between USD 12.2 -14.3 bn – over the next 12 months to meet the current capital regime’s minimums plus buffers. If we extend this analysis to 24 months, HSBCNA will require between USD 17.2 – 19.3 bn – intimating a negative equity capital of USD 1.4 bn in Year 2 (prior to any regulatory fines that we’ve become accustomed to). To put this into perspective, if Year 2 is the base case, HSBC Holdings plc (5.HK/HSBA.LN) would need to raise between 18.0%-19.5% of its market-cap just for the US alone; and* Japan Readacross Is Not Positive On Two Fronts: There is a potential negative readacross to Japanese financials, as developed market financial sector regulators are likely to exhibit solidarity in encouraging capital return prudence. In addition to the challenges that the mega-banks will have under the new COVID-19 capital regime, so will they be challenged domestically. MUFG Americas (MUFGA) would appear to need between USD 4.6 – 6.2 bn to meet regulatory minimums plus buffers under the current capital regime – yet would remain solvent.  

Sumitomo Mitsui Financial Group (8316 JP)

Mitsubishi UFJ Financial (MUFG) (8306 JP)

Sumitomo Mitsui Financial Group (Sponsored Adr) (SMFG US)

Sumitomo Mitsui Financial Group (Sponsored Adr)

Mitsubishi UFJ Financial (MUFG) ADR (MUFG US)

HSBCホールディングス – 米国の改訂ストレステストで破綻の恐れ