HSBC faces US$15b BoCom write-down

Staff reporter

HSBC (0005) faces a potential US$15 billion (HK$117 billion) write-down for the overvaluation of Bank of Communications (3328) and is in a quandary over whether to offload its stake in the fifth-largest Chinese bank.

While many Western banking giants have already divested such holdings, HSBC has retained its approximately 19 percent stake in BoCom since 2004, with Europe's largest bank by market value asserting that the investment is strategically significant for its Asian growth aspirations.

However, there has been a growing disparity between HSBC's valuation of the shareholding and the lower value indicated by BoCom's stock price.

In August, HSBC internally valued it at US$23.9 billion, approximately US$14.5 billion higher than the value implied by the shares, the Wall Street Journal reported.

In recent months, two banks, namely London-based Standard Chartered (2888) and Canada's Bank of Nova Scotia, have taken write-downs on their respective stakes in Chinese lenders.

The assessment of BoCom's value has been a persistent issue for HSBC, as highlighted by research provider Autonomous. Analyst Manus Costello noted in an October client note: "We do suspect that one day HSBC will have to take the plunge on impairing the BoCom stake."

According to the report from the WSJ, the uncertainties surrounding BoCom, such as the possibility of HSBC considering a sale, go beyond intricate accounting matters. They also underscore HSBC's distinctive position as a major Western bank heavily invested in its future growth in mainland China and across Asia.

Andrew Collier, managing director of Orient Capital Research in Hong Kong, said, "HSBC is desperately trying to straddle between the Chinese political system and the US dollar-based political system."

Furthermore, selling assets in China would signal a lack of confidence in the future of the Chinese economy and suggest a shift of allegiance to the West, which would not be well-received in China, explained Collier.

HSBC asserts that its valuation of BoCom adheres to accounting rules and is grounded in a thorough analysis of historical earnings, as well as long-term projections for cash flows, inflation, and interest rates. The bank emphasizes that management lacks discretion in deciding whether to take an impairment.