Research firm Forensic Asia calculates that HSBC has overstated the value of the assets on its balance sheet by more than £50bn
HSBC could have overstated its assets by more than £50bn and ultimately need a capital injection of close to £70bn before the end of this decade, according to an incendiary report published by a Hong Kong-based research firm .
Forensic Asia on Tuesday began its coverage of Britain’s largest banking group with a ‘sell’ recommendation, warning the lender had between $63.6bn (£38.7bn) and $92.3bn of “questionable assets” on its balance sheet, ranging from loan loss reserves and accrued interest to deferred tax assets, defined benefit pension schemes and opaque Level 3 assets.
The broker’s note is written by two of its senior analysts, Thomas Monaco and Andrew Haskins .
Mr Monaco is a former senior bank examiner at the Federal Reserve Bank of New York and previously worked as a fund manager at FrontPoint Partners, the hedge fund that spotted the US subprime bubble. As well as this, he has also spent a decade as a banks analyst at various leading investment banks.
Mr Haskins previously worked at HSBC for 15 years, mainly as a telecoms analyst, and also co-ran Japanese bank Mitsubishi UFJ’s Hong Kong-based research team.
In the report, the analysts apply what they describe as a “moderate stress test” to the balance sheets of HSBC’s major subsidiaries. From this analysis they conclude that even using a low-end estimate, the assets of the bank’s Hong Kong division, for instance, are overstated by about $15bn, while those of its UK subsidiary could be overvalued by $17bn.
Taking the analysis further, the report sets out the impact of incoming Basel III capital rules and says HSBC could be required at a minimum to raise close to $60bn in new capital by 2019 and potentially as much as $111bn.
“In our view, HSBC has not made the necessary adjustments, during the quantitative easing reprieve. Rather, it has allowed legacy problems to linger as new ones in emerging markets gather pace. The result has been extreme earnings overstatement, causing HSBC to become one of the largest practitioners of capital forebearance globally. This charade appears to be ending, given how few earnings levers remain besides selling off core elements of the franchise and the stringencies of Basel III compliance,” wrote Forensic Asia.
The broker adds: “While having stated capital ratios well above peer averages is all well and good, HSBC’s stated capital ratios would appear to be nothing more than a mirage if our analysis is correct.”
Even under current capital rules, Forensic Asia estimates that its valuations of HSBC’s group and subsidiary balance sheets suggests the bank has a current capital shortfall of $45.1bn.
The report adds the workings do not include probable litigation costs linked to various claims on the bank, which they see coming in at no less than $10bn.
HSBC, Britain’s biggest bank by market capitalisation and total assets, is also reckoned to be the UK’s best capitalised major lender, with a tier 1 ratio of 12.8pc, well above the minimum required by the Prudential (Frankfurt: PRU.F - news) Regulation Authority.
Most analysts rate HSBC shares a 'buy', arguing the bank has plenty of excess capital. Deutsche Bank (Xetra: DBK.DE - news) reckons the lender has $500bn in excess deposits and liquidity and will benefit strongly when interest rates rise.
Simon Maughan, head of research at OTAS Technologies, told CNBC : “If we look at the credit market and implied volatility on HSBS shares, it’s significantly less than the European bank average—whether it’s equity, credit or option markets, they’re not concerned by this story.
“What Tom [Thomas Monaco] is saying is HSBC has surplus capital but under his stress test environment, that disappears—well, that’s kind of what surplus capital is there for in the first place.
“Secondly he’s saying they haven’t used the period of QE to dispose of legacy assets. It’s precisely because of HSBC’s capital strength that they made the decision to hold onto those legacy assets and get a better price for them when they matured ... I don’t think that it’s something major shareholders, certainly the ones we speak to, are concerned about.”
HSBC declined to comment.