The Latest HSBC Scandal: An $80 Billion Capitalization Shortfall

Tyler Durden's picture

Forensic Asia, a Hong-Kong-based reserch firm issued a "sell" recommendation on HSBC on the basis of "questionable assets" on its balance sheet. As The Telegraph reports the analysts involved actually worked at HSBC for 15 years and suggest the ginat bank 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. "HSBC has not made the necessary adjustments, during the quantitative easing reprieve...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."

 

Via The Telegraph,

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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 (a former senior bank examiner at the Federal Reserve Bank of New York) and Andrew Haskins (previously worked at HSBC for 15 years).

 

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In the report, the analysts apply what they describe as a “moderate stress test” to the balance sheets of HSBC’s major subsidiaries.

 

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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.”

Interestingly, these findings do not include litigation costs which can only make matters worse. Of course, this kind of "mirage" is just as applicable to the entirely opaque Level 3 assets of all the majot TBTF US banks so one can only imagine just how large the capital shortfalls really are. But don;t worry - Cramer says NIM will be huge (but the banks themselves don't)...