HSBC announces 62% fall in profits
HSBC it is to tap up shareholders to the tune of £12.5 billion after announcing a 62% plunge in profits.
Europe's biggest bank has issued a statement explaining that it needs the cash to soften the blow of the uncertain economic climate.
In what will be Britain's biggest ever rights issue, HSBC will offer 5.06 billion shares at 254p each, which is a 48% discount from the bank’s Friday's 491.25p close.
HSBC is the latest big company to seek shareholder aid. The bombshell came as it unveiled a 62% plunge in pre-tax profit of £6.5 billion for 2008 - which included a goodwill impairment charge of £7.4 billion.
The bank has been particularly hard hit by the collapse of the US sub-prime mortgage market.
HSBC's full-year dividend has also been cut by 29% to $0.64 per share. Its outlook for 2009 remains bleak, with the bank predicting a tough year ahead. It also announced the closure of its ailing US consumer loans business.
In Hong Kong, trading in HSBC's shares was suspended for Monday's session ahead of the announcement.
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.
A way a company can raise capital by creating new shares and invite existing shareholders in the company to buy these additional shares in proportion to their existing holding to avoid a dilution of value, which means keeping a proportionate ownership in the expanded company, so that (for example) a 10% stake before the rights issue remains a 10% stake after it. As an added incentive, the new shares are usually offered below the market price of the existing shares, which are normally a tradeable security (a type of short-dated warrant) and this allows shareholders who do not wish to purchase new shares to sell the rights to someone who does.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.