HSBC Reports, Remains A Hold

Today (Monday), HSBC Holdings plc (HBC) posted 2008 full-year pretax profit of $19.9 billion, excluding goodwill impairment charges - down 18% year over year. This was modestly above our full-year estimate of $19.2 billion. Including the goodwill write-off, pretax profits were $9.3 billion - down 62% year over year.

Most businesses reported profits for the year, except North America, where there was a loss of $15.5 billion, including a $10.6 billion goodwill impairment in personal financial services. HSBC has decided that it will no longer write consumer finance business through the HFC and Beneficial brands in the US and is closing the majority of the network, allowing the remaining business to run off. HSBC acquired those businesses in 2003 for $14.8 billion when it purchased Household International, Inc., a leading sub-prime consumer lender.

The company paid a 4th quarter interim dividend of $0.10 per share (or 0.50 per ADS), bringing the total for the year to $0.64 (or $3.20 per ADS), a 31% decline relative to last year’s $0.93 (or $4.65 per ADS). More importantly, HSBC will be cutting the 2009’s first 3 interim dividend payments to $0.08 each (or $0.40 per ADS).

HSBC will be issuing $17.7 billion in new shares under a fully underwritten rights issue that will increase capital ratios by about 150 basis points, with the core Tier 1 equity ratio rising to 8.5% and the Tier 1 capital ratio advancing to 9.8% - near the top of HSBC’s 7.5-10.0% target range. However, this will cause significant dilution to existing shareholder interests.

We have a Hold recommendation on HBC shares. The current Zacks rank is 3, indicating no clear directional pressure on HBC shares. HBC is down over 19% in morning trading from yesterday’s closing price of $34.80. Our estimates are under review.

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