HONG KONG, March 2 (Chinese media) -- HSBC on Monday proposed a five for 12 rights issue to raise about 17.7 billion U.S. dollars, as its 2008 net profit turned out to be 5.7 billion U.S. dollars, down 70 percent year on year.
The directors proposed to cut the full-year dividend by 29 percent to 0.64 U.S. dollars per share, with a dividend of ten cents from the fourth quarter.
Announcing the worse-than-expected annual results in Hong Kong on a conference call with reporters in Hong Kong, group Chairman Stephen Green admitted the impact of the global financial crisis and economic downturn was huge although HSBC "fared better than most."
The market had previously expected a profit decline of between 20 percent and 25 percent, whereas the scale of the fund raising was in line with market expectations.
The proposal of rights issuing and dividend cut were also beyond expectations, as analysts had previously said HSBC was mostly likely to opt between the two.
HSBC announced on Monday it will offer five shares at 254 pence(28 HK dollars) each, to investors for each twelve that they already owned. It represented a discount of 50.8 percent from Friday's closing price of 56.95 HK dollars.
Trading of HSBC shares on the Hong Kong stock market was suspended on Monday after British and U.S. media reported on the details of the planned rights issue.
The company has avoided taking government funding so as to remain independent, a decision that puts it in a different category from the Royal Bank of Scotland.
Green cited higher capital requirement and potential market challenges ahead to defend the rights issue, which dwarfed the previous record of 17 billion U.S. dollars, or 12 billion pounds, set by cash-strapped Royal Bank of Scotland in April.
"We are determined that HSBC should maintain its signature financial strength," Green said.
If the rights issue is approved by shareholders on March 19, it is expected to significantly improve the capital adequacy of HSBC, raising its core equity tier 1 capital ratio from 7.0 percent to 8. 5 percent and its tier 1 ratio to 9.8 percent.
Green said the share sale has been fully underwritten by institutional investors including the Goldman Sachs Group Inc., JP Morgan Chase Co., etc.
The company also announced that it will write no new consumer finance business through the HFC, or HSBC Finance Corporation, and Beneficial brands in the United States and close the majority of the HFC and Beneficial network.
This will lead to a loss of 6,100 jobs, said group CEO Michael Geoghegan.
HSBC reported a pre-tax loss of 15.5 billion U.S. dollars from its North American operations, compared with a profit of 91 million U.S. dollars in 2007, whereas the emerging markets contributed at least two thirds of the group's profit before tax.
"These underlined the success of our strategy of being a emerging markets-led, financing-focused strategy," Geoghegan said from the London headquarters.
Looking ahead, Green said 2009 will be another challenging year, adding that he believed HSBC remained "well-capitized, liquid and profitable."
Castor Pang, strategist at Sun Hung Kai Research, said he believed the share price of HSBC is likely to open sharply lower on Tuesday on the dilution effect.
The share price was unlikely to surge on the expiration date of the rights, either, thereby making it almost impossible to speculate on the rights issue, he said.
The market has the capacity to absorb the rights issue, as the discount was substantial and the scale of the fund raising was in line with expectations, he added.
Share price of HSBC, which was listed in both Hong Kong and London, tumbled 20 percent after the opening of the London stock market on Monday. (7.8 HK dollars = 1 U.S. dollar)
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