Just over 11 years ago, HSBC asked its shareholders to back an unprecedented £12.5bn rights issue. The March 2009 capital raising — at the time, the biggest ever by a British company — was among the first of many by shell-shocked banks over the following few years. Some were funded by commercial investors, others by taxpayers. All were crucial to save the global banking system from collapse after the 2008 financial crisis.
As the world reels from coronavirus — and effects that are set to be an order of magnitude worse than the 2008 crash — it is striking that the question of whether banks will again need new capital is barely being asked.
That is partly because so many other problems are rightly taking priority — people’s health; whether businesses can survive. But the health and survival of banks is a pretty essential question, too. As in any economic crisis, banks will bear the brunt. So are they sufficiently resilient to absorb the impact and then power an economic recovery?
So far, credit losses look manageable. In the first quarter of 2020, banks increased loan loss provisions sharply, but they are still at a fraction of their 2008 peak.
To try to offset the pressures, governments and central banks have intervened at unprecedented speed and scale, injecting hundreds of billions of dollars of grants and subsidised funding.
At the same time, banks have much stronger capital buffers than when the 2008 crisis hit. HSBC’s core equity tier one capital ratio — the principal measure of balance sheet strength — is 14.6 per cent today, underpinned by $144bn of tangible equity. Back in 2009, it was just 8.5 per cent, even after that mammoth £12.5bn capital raising.
In some jurisdictions, banks have protected capital further by not paying dividends, following strict instructions from regulators. Here, too, HSBC has been a protagonist. Long one of the biggest payers on the FTSE 100, the bank’s stock yielded close to 6 per cent at the last count. Its dividend stream is a primary source of income for thousands of private investors in Hong Kong. But last month, for the first time in nearly 75 years, it cancelled its dividend, preserving billions of dollars in the process.
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But all these mitigating efforts might still not be enough, given the potentially huge scale of this crisis. Even if the banking system’s protections are double or even triple what they were in 2008, things could easily be doubly or even triply bad.
Early-warning indicators have already left 2008 in the shade. Twelve years ago, US unemployment topped 7 per cent. Today it has already hit nearly 15 per cent. A global recession, or even depression, is now widely predicted. The Bank of England forecasts that UK GDP could fall 14 per cent, making the 2020 slump the worst for more than 300 years.
At the same time, bank loan loss provisions are likely to be only the tip of a looming iceberg, despite new accounting rules that they should provision upfront against all envisageable losses on non-performing loans. UK regulators actively discouraged banks from booking huge charges on souring loans, fearing this would hold back new lending. The granting of payment holidays has also allowed banks to avoid booking large losses in the short term, lessening the pressure on capital.
But make no mistake: that pressure will come. Last week, PNC, America’s ninth-biggest lender, announced the sale of its entire 22 per cent stake in asset manager BlackRock, an early example of bank capital raising in the current crisis. Spin was applied, suggesting the bank might use the funds to buy rivals. A more powerful rationale is this: the estimated $5bn gain will have boosted its CET1 capital ratio from a lowly 9.4 per cent to a more loss-absorbent 11.5 per cent. Expect more of the same in the weeks and months ahead.
At the FT’s Global Boardroom online conference last week, an audience of nearly 6,000 who tuned in to a banking panel were polled on this topic. Only 6 per cent thought none of the world’s top 50 banks would need to raise new equity capital. Half thought that more than 20 per cent of banks would have to do so. Lenders that seek funds early are more likely to keep investors with them. Just ask HSBC. In the six months that followed its 2009 capital raising, its share price doubled.
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