LONDON: HSBC's capital surplus may be hiding in plain sight. Shares in the Asia-focused bank have declined by 3.2 percent since new Chief Executive John Flint unveiled a strategy reboot earlier this month. Investors' disappointment centered on a pledge to merely maintain - rather than raise - dividend payouts. But it's likely HSBC is just being cautious.
The bank headquartered in London is facing some regulatory challenges. From January 1 next year the Bank of England is expected to tighten capital requirements to address the risks posed by so-called "double leverage". This occurs when a bank holding company like HSBC borrows to inject capital into its subsidiaries. Though selling bonds is cheaper than issuing equity, the bank's ability to service the debt relies on the subsidiary's earnings - and on local regulators allowing the unit to pay dividends to its corporate parent. Both are potentially volatile, particularly for a behemoth like HSBC with lots of far-flung subsidiaries.
Meanwhile, the phasing in of global standards to measure the riskiness of certain loans could also inflate HSBC's risk-weighted assets (RWAs), effectively lowering its capital ratio.
Flint has anticipated this by raising the lender's minimum common equity Tier 1 capital ratio to 14 percent, a full percentage point higher than the target set by his predecessor Stuart Gulliver. HSBC's current CET1 ratio of 14.5 percent adds another modest buffer.
Assume earnings per share grow to 84 cents by 2020, as predicted by analysts according to Eikon, and the bank pays out 51 cents per share a year in dividends. If RWAs grow by 2 percent annually, HSBC should generate $9 billion of spare capital over the next three years that could be returned to shareholders, according to Breaking views calculations.
Even if the BoE rules prove tougher than expected, HSBC's CET1 ratio would have to rise to almost 15.5 percent to wipe out the capital surplus.
Of course, HSBC's reliance on Asian trade means a Donald Trump-induced trade conflict with China could upset these plans. But if the bank and its regulators avoid unpleasant surprises, Flint could eventually afford to be a lot more generous than shareholders currently expect.
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