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HSBC needs ‘$111 billion capital injection’: Analysts

Friday, 17 Jan 2014 | 2:39 AM ET
Adam Jeffery | CNBC

HSBC, one of the world's biggest banks, has "glaring problems" and may need to plug a $111 billion capital gap, a controversial new report claims.

Two analysts for Forensic Asia, a recently launched boutique Hong Kong research firm, have heavily criticized the bank for "overstated earnings, inadequately capitalized balance sheets, legal and regulatory problems" in a research note this week.

'Number of concerns' facing HSBC: Forensic Asia
Friday, 17 Jan 2014 | 5:00 AM ET
Thomas Monaco, managing director at Forensic Asia, explains his assessment of HSBC and why he believes that the group could find itself with a significant capital shortfall.

HSBC is generally viewed as one of the U.K.'s best-placed banks, and came through the financial crisis without having to raise extra capital, thanks in large part to the global scale of its operations. It had a tier 1 capital ratio – a key measure of financial health – of 13.3 percent at the end of the third quarter of 2013 – far above the 4 percent required by international regulators.

(Read more: HSBC profits up, but forex probe casts shadow)

Yet the Forensic Asia analysts, Thomas Monaco and Andrew Haskins, argue that it has overstated its balance sheet, with "questionable assets" worth between $63.6 billion and $92.3 billion – or between 4.7 and 6.8 years worth of post-tax results. This means the bank must raise $58 billion to $111 billion by 2019 to meet new, more stringent capital requirements, they argued.

(Read more: HSBC UK spin-off will have to join the queue)

Market not concerned about HSBC: Pro
Simon Maughan, head of research at OTAS Technologies, says that HSBC's share price reaction shows that investors are not concerned about a report arguing the group is facing a major capital hole.

HSBC declined to comment on the report. The bank's share price in Hong Kong fell slightly on Friday.

Simon Maughan, head of research at OTAS Technologies, told CNBC that the muted share price reaction shows that investors are not concerned about the report.

The Forensic Asia report also accused HSBC of being "one of the largest practitioners of capital forbearance globally." Forbearance, where a company is allowed to just pay enough to service its debts rather than pay off the capital, has been blamed for a growing number of "zombie" companies around the world. Some economists are concerned that, when interest rates start to rise, more of these companies will be unable to pay off their loans and will collapse.

(Read more: The dangers of zombies)

One of the main arguments put forward by Forensic Asia is that HSBC has not reduced its exposure to financial-sector problems in mainland China quickly enough. HSBC's exposure to the Hong Kong mortgage market, which is rapidly shrinking as the government clamps down on lending, was another cause for concern. The bank's also came under fire for the "weak credit quality" of its lending policy around the world -- particularly in France and the Middle East.

- By CNBC's Catherine Boyle. Twitter: @cboylecnbc.

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