HSBC

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Friday is the last day to subscribe to buy more shares in HSBC. If the take-up is anything as uncritical as the shareholder meeting last month – where over 99 per cent of votes cast favoured Britain’s biggest ever rights issue – then next week’s sales should be a breeze. Some funds will buy for the right reasons, trusting in HSBC’s size, in the fact that its shares trade at a 23 per cent premium to the global sector, and in management assurances that it couldn’t ever imagine seeking government support. Many others will pile in on the basis of the bank’s weighting in indices, its dividend yield and the simple fear of missing out on a financials-led rally.

But management should not mistake herd-like behaviour for a vote of confidence. Complacent talk of “signature financial strength” rings hollow so long as the fate of HSBC Finance – aka Household, a 2003 acquisition that chairman Stephen Green belatedly disowned last month – remains unresolved. About two-thirds of the $147bn US consumer loan book is now in run-off, with the remaining credit card business still active. But admitting defeat in subprime is only half the story. What now? Are shareholders on the hook for all losses, come what may?

Unrealised losses at HSBC Finance already amount to $34bn and could plausibly increase. Deutsche Bank, for example, predicts that a trough in US house prices is still two years away. If unemployment keeps rising, more homeowners will post keys to lenders. Credit markets, meanwhile, have begun to price in the possibility that HSBC will do something similar with its unloved US arm. Spreads on HSBC Finance debt, which has no recourse to HSBC, have diverged from the holding company’s. The yield differential between bonds of similar maturities was about 30 basis points in January. Now it’s near 200.

Chief executive Michael Geoghegan admitted this week that the US credit card business faced a tough two years, and that management “may have to think about it again”. Too right. Shareholders are subsidising non-recourse debtholders in a vehicle outside the banking system. The boil is unlanced.

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