HSBC (HBC) And The Great American Bank “Stress Test”

The rights offering made by HSBC (HBC) raised over $18 billion and the participation rate was over 96%. That should give banks which may need to raise capital in the near future some hope that private money is sitting on the sidelines looking for good deals in the financial services industry.

But, HSBC does not look like any other American bank, except perhaps the most healthy– JPMorgan (JPM) and Goldman Sachs (GS).

Regulators will meet this week to decide how to apply the results of the government’s new bank “stress test.” Those discussions may be complicated by the program for a public/private partnership to help financial firms rid themselves of toxic assets and the new “no more mark-to-market” accounting standards. In other words, what might have been a troubled bank last quarter may not be one this quarter. On the negative side of the scales is the fact that a worsening recession could cause more large write-offs in banks’ consumer and business lending and commercial real estate portfolios.

There is a temptation to look at the success of  HSBC’s plan to raise capital and the fact that Citigroup’s (C) shares are up over 150% during that last month and say that any large bank can raise outside cash. But, with the increase in the value of Citi’s stock, its market cap has only recovered to $15 billion. If the company has to raise $10 billion, the dilution would be murderous, and that could well keep new money out.

Despite the excitement over the HSBC’s news and rumors that Goldman Sachs (GS) may have the capital to pay back its TARP money, the weakest US banks are still remarkably weak. If they cannot find buyers for their toxic assets under the government’s new balance sheet cleansing program the only place they have to turn is back to the Treasury and the Fed. Depending on first quarter earnings and forecasts for the balance of the year the need for new capital may be only a few weeks away.

Douglas A. McIntyre