People wait in line at an HSBC branch in Hong Kong. Europe's largest bank is forecast to suffer its first profit decline since 2002. Bloomberg

HONG KONG: HSBC Holdings, Europe's largest bank , is expected to post its first full year net decline in profit in seven years, say analysts eyeing the lender's capital position and dividend policy.

HSBC will announce its annual results on Monday. The bank's 2008 net profit is expected to drop by 5.9 percent to over 40 percent, according to estimates of five brokerages It will be the bank's first profit decline since 2000.

JP Morgan expects HSBC's earnings to fall by 44.1 percent to $10.09 billion. The estimate is the lowest among the major brokerages. The decline is driven by the losses at HSBC Financial Corporation (HFC), deteriorating credit quality across all businesses and goodwill write-downs.

The brokerage forecast HSBC would book a goodwill write-down of $5 billion in 2008, representing approximately half of the goodwill carried at the group level for HFC. The bank's $1 billion Madoff provisions probably will be factored in the second half of 2008. Total loan loss provisions may further increase to $22.97 billion from $17.24 billion in 2007.

JP Morgan notices that investors are focused on the fourth quarter dividend and management guidance on dividend policy. The brokerage estimates HSBC will cut its full year dividend per share to $0.4 in 2009 from $0.9 in 2008.

Deutsche Bank said HSBC needs to take action to bolster its capital ratio. "Our stress test suggests potential downside to capital ratio of 296 basis points," the brokerage said in a research note, suggesting that the core tier one capital ratio fall could close to 5 percent within two years and the tier one ratio towards 6 percent in 2009.

The estimated 2008 core tier one capital ratio for HSBC is 8 percent and 9 percent on the tier one ratio.

Market watchers expect HSBC to boost its capital by cutting 2009 dividend or through an issuance of shares.

"We believe large scale bank equity issuance is unlikely to be an easy task in the current environment," Deutsche Bank said. Deutsche Bank said it is betting HSBC will make its adjustments on dividend.

The brokerage forecasts a substantial decline in dividends. The full year dividends in 2009 will fall to $0.643 per share, down from $0.918 in 2008, the dividends for 2010 likely will be $0.707.

Merrill Lynch, which forecasts HSBC's core tier one ratio at 7.7 percent at the end of last year, is also looking for greater clarity of the bank's capital position.

The brokerage expects HSBC's 2008 net profit to decline by 16.8 percent to $15.85 billion, with second half earnings broadly in line with the first half's $7.7 billion. The fourth quarter dividend is expected to be $0.36 per share.

Deutsche Bank estimates HSBC to book a loan loss provision of $23.41 billion representing a year-on-year increase of 22.3 percent.

Shares in HSBC down 0.87 percent on Friday to close at HK$56.95, compared with the benchmark Hang Seng Index's 0.65 percent loss.

(HK Edition 02/28/2009 page5)