The Fed and The Treasury Will Also Drive The Yield Curve Shape
HSBC released its Q1-2018 results this morning which were a little underwhelming with bottom line profit before tax a touch below estimates (down 4% on Q1-17) and return on equity of 7.5% (compared to 8.0% in Q1-17), but that aside the numbers give investors little concern. HSBC is a Globally Systemically Important Bank (that requires an additional 2% of buffer capital), it has highly diversified income streams, a prudent management, leverage of 5.6% and a healthy CET1 ratio of 14.5%. What is not to like?
Well, we all know that HSBC is one of the pillar banks that still has some issuance capacity in AT1, before it reaches its 1.5% maximum threshold. Likewise I am sure that many investors are waiting for the next new AT1 deal to be launched from this blue-chip issuer given its robust credit-metric profile and investment grade rating at the deeply subordinated level.
However, this morning we took a step back when reading the accompaniment to the Q1 results, which highlight some adjustments to HSBC’s capital. The bank is calling two old legacy Tier-1 deals (circa.$6bn), which we see as a sensible clean-up. In addition they are including 18 Tier-2 grandfathered securities as eligible Tier-2 capital, thereby increasing their Total Capital Ratio by 150bps. Once again, from a debt holders perspective, perfectly understandable capital management. However, where we become somewhat more disgruntled is from the announcement that HSBC intends to initiate a $2bn share buy-back, while issuing the remainder of their AT1 allocation.
To us debt investors it is a bit like giving from one hand and taking from another. Issuing AT1 debt to facilitate a share buy-back may appease equity holders but it doesn’t sit well with us as subordinated bond investors. We are all for treating equity and debt investors equally, but this appears to be strongly favouring the former. As such we will be looking for a premium in any price talk for the new AT1 deal(s).