HSBC’s stake in state-owned Bank of Communications is reportedly at risk of being overvalued. Market analysts contemplate the prospects of a write-down and other options.
Internally, HSBC has valued its approximately 19 percent stake in Shanghai-headquartered Bank of Communications (BoCom) at $23.9 billion. Compared to the market share price, this is about $14.5 billion above the suggested level and according to a «Wall Street Journal» report citing analysts, the British lender faces risks in the future.
Based on the implied level, a write-down would affect HSBC's earnings and cause its tangible book value to shrink by 7 percent, according to a note in October authored by Manus Costello, an analyst at research provider Autonomous.
«We do suspect that one day, HSBC will have to take the plunge on impairing the BoCom stake,» Costello said.
Option to Sell?
Although a sale could soften the impact, some believe that there are other factors to consider, such as HSBC’s relationship with the Chinese government.
Several analysts said that the bank has limited options as a disposal of the BoCom stake could risk angering authorities and disrupt its plans to expand in the country, according to Moody’s Investors Service, which requires licenses and approvals from local regulators.
«Rigorous Accounting Process»
HSBC is BoCom’s second-largest shareholder behind the Chinese government after buying a stake in 2004 for $1.75 billion and adding another $1.7 billion stake in 2012. According to HSBC, its valuation of China’s sixth-largest lender by assets is in line with accounting rules.
«There is a rigorous accounting process and we will just follow the process,» chief financial officer Georges Elhedery told analysts on a call in October.
