Market Scan
HSBC Loses Its Sheen
Vidya Ram , 10.24.08, 2:10 PM ET
LONDON - HSBC 's huge presence in fast-growing Asian economies had placed it in an ivory tower, away from the financial market turmoil. But on Friday it fell to earth, as those markets lost their appeal. Investors focused on the bank's exposure to the American mortgage market and the impact that rising corporate defaults could have on their credit derivative exposure.
Shares of HSBC (nyse: HBC - news - people ) had tumbled 13.5% at the end of trading Friday, closing 109.00 pence ($1.72) lower at 696.00 pence ($11.03), below the Dow Jones Eurostoxx banking index, which had fallen 7.1%.
As global markets plunged on fears of a recession, Morgan Stanley analyst Michael Helsby cut his price target for the bank by a quarter, to 75.00 Hong Kong dollars ($9.67), from 100.00 Hong Kong dollars ($12.89), and cut his forecasts for 2009's dividend by 50.0%. "HSBC is a bank and is a materially leveraged play on the events that are unfolding in the U.S., U.K., and now in emerging markets," he told investors in a note. "We would sell the shares."
Banco Santander (nyse: STD - news - people ), another bank also exposed to emerging markets, this time in Latin America, also fell on Friday, closing down 10.2%, or 81 euro cents ($1.02), to 7.15 euros ($9.06), in Madrid.
According to Panmure Gordon's Sandy Chen, who has had a "sell" rating on HSBC for a year, now that emerging markets are no longer a cushion, investors are focusing on some of its less-palatable assets.
"They are exposed to the deteriorating U.S. market through their mortgage business, and the additional concern is their exposure in structured credit, credit derivatives and synthetic CDOs ," he told Forbes.com. Though their exposure to these instruments is significantly less than banks such as Barclays, these derivatives are "coming under significant pressure now that it looks like we are entering a definite recession and the rate of corporate defaults will rise," says Chen.
Since August 2007, HSBC's exposure to retail deposits particularly in Asia has helped markets forget that the bank was one of the earliest to suffer subprime pain. The bank's warning last February that it was stepping up its loan provision at its Household International division in the U.S. was seen as one of the first signs of the global subprime crisis. (See "Better Safe Than Sorry." )
$52.46 (10/27/08)
