HSBC may have its rating downgraded after it revealed a $1-billion exposure to the Madoff Investment Securities.

The Europe's largest lender admitted on Monday night that it had $1 billion at risk after providing financing to funds that invested with Madoff, whose moneymanaging firm collapsed last week.

It also has custody clients with investments in Madoff funds, which the bank believes will not result in more Madoff exposure for itself.

JPMorgan worries that this exposure may be classified as NPL (non-performing loan), shedding the pre-tax profits of the bank for 2008.

The firm points out another risk that may be triggered. "The possibility of the Madoff case acting as a trigger for a wave of redemptions could place banks' exposures to hedge funds at additional risk," JPMorgan's analysts wrote in a research note yesterday, adding that this is a generic risk in banking and HSBC is unlikely to be immune.

Concerning about the rising credit stress and the possibility of the bank to seek recapitalization, "the stock's premium rating and outperformance related to confidence in management, dividends and capital ratios - all of these are at risk."

Goldman Sachs has placed its earning estimates, target price and rating under review on the premise that HSBC's $1 billion in Madoff exposure may result in significant, if not complete, writedowns.

CLSA said HSBC may seek to raise about $14 billion as increasing bad-loan provisions erode profits.

The bank may raise funds through a share placement or a rights offering, CLSA analysts led by Bangkok-based Daniel Tabbush said in a note yesterday.

CLSA cut its share price target for HSBC by 30 percent to HK$64, citing the risk that rising loan defaults in the UK and US will hurt earnings. Shares in HSBC closed unchanged yesterday at HK$84.2.

Workforces cut in Taiwan

Separately, HSBC is planning to trim its workforces by 10 percent in Taiwan by the end of this year as the economy slows and it integrates a recently acquired local bank.

Nicholas Winsor, CEO and president of its Taiwan business, also said yesterday that HSBC expects its loan growth in Taiwan to slow from 2008 levels.

"It is unlikely in the current environment the loan growth will be faster in 2009 than this year," Winsor told reporters on the sidelines of a business event. "Many of our clients had investment projects. They were put on hold."

HSBC has not been hit as hard as its major rivals by the global financial crisis, but the economic slowdown prompted the lender to offer voluntary buyouts for its employees.

Under the program, 300-400 out of its 3,000 employees are leaving at end of this year, he said.

Agencies contributed to the story

(HK Edition 12/17/2008 page3)