HSBC Warns of More Share Price Volatility

HSBC, whose shares fell to their lowest level since 1995 on Monday but enjoyed a bounce on Tuesday, said further price volatility was likely on Wednesday as investors position themselves ahead of the bank's $17.7 billion rights issues.

Asia Chief Executive Officer Sandy Flockhart also told reporters on Tuesday in Hong Kong that the bank has a loyal base of shareholders ready to support its rights issue.

HSBC's shares have been bludgeoned since the bank unveiled a $17.7 billion rights issue priced at HK$28 in Hong Kong to shore up its balance sheet.

They clawed back 14 percent in Hong Kong trade on Tuesday after its biggest slide in at least three decades a day earlier, but gains were limited by caution on the lender's outlook and its massive upcoming cash call.

Kirsty Wigglesworth / AP An HSBC sign is shown at a branch in London.

Market watchers, taken by surprise as the stock nearly doubled its daily loss in the final seconds of Monday's 10-minute closing auction, said HSBC was unlikely to fall below its rights issue price of HK$28 before Thursday when it trades ex-rights.

The stock was up 14.6 percent at HK$37.80 by midday. HSBC fell 24 percent on Monday to HK$33, its lowest level since 1995, as large investors shorted the stock ahead of the $17.7 billion rights issue.

Hong's securities watchdog, the Securities and Futures Commission, said it was looking into Monday's sharp fall.

"Some selling pressure still stays with some investors scrambling to raise money for the rights issue and others shorting it so they can buy at the more attractive rights issue price," said Patrick Yiu, associate director with CASH Asset Management.

"The consensus is that the stock will continue to fall even after the rights issue as investors keep one eye on developments in the U.S. and the other on UK," he said.

Other bank stocks that slumped on Monday also recovered with Bank of East Asia up 6 percent and BOC Hong Kong, 4 percent higher. HSBC's local unit Hang Seng Bank, which has been sliding for six straight sessions since announcing a 46 percent drop in it second-half earnings, rose 1.4 percent.

Standard Chartered was the only major bank stock in the red, down 0.8 percent.

Outlook Remains Concern

The credit default swap spreads on HSBC Bank narrowed 8.5 basis points to 166.6 on Tuesday, after widening to a record 176.3 basis points on Monday along with the sell-off in its shares.

HSBC's credit spreads remain much lower compared with other major global banks, showing that investors see less risk of a debt default. The Thomson Reuters Counterparty Default Index, which averages the benchmark CDS spreads on 13 major global banks and brokerages, stood at 280 basis points as of Monday.

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HSBC , which unlike many other global lenders turned a profit in 2008, reported last week a loss of $16.5 billion on its U.S. business, compared with $1.1 billion a year ago.

The bank said it would shut most of its U.S. consumer lending business but worries persist over its $62 billion in outstanding loans at its HSBC Finance arm in the United States at the end of the fourth quarter and rising provisions in the bank's UK business.

The stock shed 42 percent, erasing $37 billion in market value, in the five sessions following its earnings announcement last Monday.

Rating agency Moody's downgraded its outlook on HSBC's senior debt to negative from stable on Monday, citing "increasing pressure on the profitability and and capital of the group as the credit crunch develops into a global phenomenon".

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