HSBC set to launch £12bn rights issue

Banking giant to ask investors to strengthen balance sheet following 26 per cent drop in pre-tax profits

HSBC is expected to lay out plans for a £12bn share issue tomorrow, as part of annual results that will show post a sharp fall in profits.

Pre-tax profit before exceptional items for the year to 31 December is forecast to drop by 26 per cent to $14.6bn (£10.2bn) as provisions jump by a third to $23.2bn, according to analysts at Exane BNP Paribas.

With provisions expected to increase further this year it has been suggested that it will raise £12bn in new capital, cut its dividend or both.

The bank has insisted that its capital position is strong but has not ruled out going to shareholders to bolster its buffer against losses. A spokesman for HSBC declined to comment on Friday.

It is the only UK bank not to have tapped investors for cash so far as banks seek to strengthen their balance sheets against the economic meltdown. Investors have said they would prefer HSBC to get a rights issue out of the way to stop the speculation, instead of waiting until it needs the capital later.

The Exane analysts said: "We do not explicitly forecast any capital raising, albeit we do acknowledge the real possibility that HSBC may launch a rights issue for, say, £10bn to £15bn." They added that a capital raising would get good support and that a more important question for HSBC was the outlook for earnings in a rapidly slowing world economy.

Profits in Europe, Latin America and Asia Pacific are expected to be up, but falling earnings from Hong Kong, the bank's biggest market, and losses at its ailing American business are set to take a toll on earnings.

At the end of September, HSBC's core tier one capital ratio, which measures the strongest layer of capital, was 8.9 per cent – near the top of its target range of 7.5 to 9.0 per cent. Until recently that would have put it among the world's strongest banks, but after the round of cash calls by its rivals, HSBC no longer has its usual big advantage on capital.

HSBC's arch-competitor in Asia, Standard Chartered, will follow with its results on Tuesday. Standard Chartered raised £1.8bn in December to shore up its capital. With virtually no exposure to the US and Britain, the bank will face questions about the health of its Asian markets and its appetite for acquisitions.

Standard Chartered is said to have been sounded out by Royal Bank of Scotland about Asian assets that RBS is putting up for sale. Analysts suspect it might use its new capital to pay for a cheap acquisition. Morgan Stanley predicts pre-tax profit for 2008 of $4.55bn, up from $4.03bn in 2007.

Standard Chartered's shares are the best performers in Britain's battered banking sector. They fell 2.4 per cent to 664p on Friday and have lost 24 per cent this year.

HSBC shares fell 6.8 per cent to 491.25p and have dropped 26 per cent since the start of 2009.