Wednesday, 14 January 2009

Another Kitchen Sink Quarter for US Banks

Remember all the talk a year ago about how US financial institutions were going to have a kitchen sink quarter in 4Q07? That is they were going to take big write-downs on toxic assets to clear the decks and start fresh. That didn't work out so well as subsequently Bear Stearns and Lehman brothers folded, the remaining investment banks disappeared by becoming bank holding companies, WaMu became the biggest bank failure in history and AIG and now Citigroup were effectively nationalized.

So here we are again, just about to get earnings after probably the worst quarter so far in this recession. Once again alanysts are too optimistic with their forecasts, there will be massive writedowns and losses from the major financial instituions again. Deutsche Bank's announcement today is just a taster, from Bloomberg:

Deutsche Bank Reports EU4.8 Billion Loss on Trading

Deutsche Bank AG, Germany’s biggest bank, reported a loss of about 4.8 billion euros ($6.3 billion) in the fourth quarter after the worst financial crisis since the Great Depression pummeled its debt and equity trading results.

The bank fell as much as 8.4 percent in Frankfurt trading. The loss, which compares with a profit of about 1 billion euros a year earlier, also reflects increased provisions for debt backed by bond insurers and “other exceptional gains and charges,” the Frankfurt-based bank said in a statement today.

click on the link for the full story. Also out today a nasty report from Morgan Stanley estimating that HSBC might have to raise $30 billionand half it's dividend, from

HSBC Holdings may need to raise $30 billion

HSBC Holdings may need to raise $30 billion in equity and slash its dividend in half, analysts from Morgan Stanley said Wednesday in a research note that challenges the perception that the bank is one of the strongest in the world.

HSBC Holdings (HBC) , Europe's largest, is unusual in that it hasn't accepted cash from any government during the credit crunch.

Morgan Stanley has long had a bearish stance on HSBC, with the broker in November estimating a capital shortfall of $25 billion that it could fill by raising $15 billion in capital and cutting its dividend in half.

But now the brokerage says HSBC needs to raise between $20 billion and $30 billion and is still calling for a halving of its dividend.

The note penned by a team led by Anil Agarwal says the group's Asian franchise isn't as well capitalized as thought. By Morgan Stanley's reckoning, HSBC's Hongkong and Shanghai Banking Corp. division has one of the lowest reserves of any Hong Kong bank, and needs an extra $5.8 billion.

Plus, HSBC has already padded its U.K. and U.S. businesses by roughly $11 billion, leaving little cushion at the group level. Morgan Stanley estimates that further losses in the U.S. will require another $5 billion in equity. And it says it can't rule out HSBC not paying a dividend for two years.

There is a good chance Morgan Stanley may be wrong, but even if they are only half right a $10 - $15 billion dollar capital shortfall is no laughing matter.

As repeated here many times, the capital injections to date for major financial instituions are just the beginning, the banking sector still needs vastly more capital to restore some semblance of normalcy. Citigroup proved that point recently when they were effectively nationised with another $20 billion injection. Now out of desperation they are selling a stake in their prized brokerage operation to raise yet more capital.