Bloomberg News

HSBC Lowest Libor Rates Diverge From Credit Indicators: Corporate Finance

February 24, 2012

A pedestrian passes an HSBC Holdings Plc bank branch in London, U.K. Photographer: Simon Dawson/Bloomberg

A pedestrian passes an HSBC Holdings Plc bank branch in London, U.K. Photographer: Simon Dawson/Bloomberg

HSBC Holdings Plc (HSBA), Europe’s biggest bank, says the interest rate it pays for short-term dollar loans is about the lowest ever relative to rivals whose bonds are performing better.

HSBC says it can borrow at 0.26 percent for three months in dollars in its submission for the London interbank offered rate, compared with 0.491 for the composite, which is calculated for the British Bankers’ Association. The 23 basis-point gap is four basis points off a record and contrasts with the bond market where relative yields on HSBC’s notes increased in the past six months while those of fellow Libor contributors Credit Suisse Group AG (CSGN) and JPMorgan Chase & Co. (JPM) narrowed.

The contrast between HSBC’s daily submissions for Libor and other measures in credit markets comes at a time when the integrity of the benchmark for $360 trillion of securities worldwide is being called into question by regulators including the U.S. Justice Department. London-based HSBC is one of 12 banks being investigated by Swiss authorities, while Canada’s Competition Bureau said the firm may have conspired to influence yen Libor to profit on derivatives.

“The gap between HSBC’s submissions and the other banks seems unusually wide, and there’s no obvious reason,” said Simon Adamson, an analyst at fixed-income research firm CreditSights Inc. in London. “In terms of its credit standing, HSBC is better placed than most of the other contributors, but that doesn’t fully explain why there’s such a big gap. It’s very marked.”

Daily Survey

Libor is calculated from a daily survey carried out for the BBA, in which the world’s biggest banks are asked the rate they’re charged to borrow over a variety of short-term maturities in currencies including dollars, euros and yen.

Shani Halstead, an HSBC spokeswoman in London, declined to comment on her bank’s submissions to the benchmark. Brian Mairs, a spokesman for the BBA, said the association is “committed to retaining the reputation and integrity” of Libor.

Three-month dollar Libor has declined or remained unchanged each day since Jan. 4, and is now the lowest since Nov. 18, according to BBA data.

HSBC’s submission to the three-month dollar rate is the lowest of all 18 banks on the dollar Libor panel and has been falling all year after plateauing at the end of November. Both HSBC’s rate and composite Libor rose to as high as 5.73 percent in September 2007, at the beginning of the deepest financial crisis since the Great Depression.

Rabobank Submission

HSBC’s three-month dollar submission compares with that of Utrecht, Netherlands-based Rabobank Groep (RABO), the top-rated privately owned lender, which along with Deutsche Bank AG (DBK) in Frankfurt posts the third-lowest rate at 0.44 percent. Zurich- based Credit Suisse is second-lowest at 0.435 percent, BBA data show.

The gap between the borrowing costs reported by HSBC and JPMorgan, the third-largest deposit-taker in the U.S., is about the widest ever.

JPMorgan reports 0.46 percent to the Libor panel, BBA data show. That’s the sixth-lowest figure and 20 basis points more than the London-based lender. The gap between the two reached a record 23.5 basis points on Jan. 27.

Moody’s Investors Service rates HSBC at Aa2, a level higher than JPMorgan, while Standard & Poor’s grades the U.K. lender at A+, again one step higher than its New York counterpart.

Rating Cut

S&P lowered HSBC’s long-term credit grade by one step from AA- in November, one of 14 of the world’s biggest banks the firm downgraded after changing its ratings criteria. S&P said it views HSBC’s business position as “very strong” relative to U.K. peers, describing it as “one of the most diverse global banking groups, whether measured by products, markets, or geographies.”

Fitch Ratings, which in December affirmed HSBC’s long-term AA grade, two levels above S&P’s rating, cited the bank’s “geographically diversified business model,” and its “conservative liquidity and funding positions.”

HSBC’s P-1 short-term rating at Moody’s is the same as that of JPMorgan, Rabobank and Credit Suisse. The U.K. lender has an A-1 short-term rating at S&P, the same as JPMorgan and Credit Suisse. Short-term grades are the key gauges of credit on the money markets.

HSBC, scheduled to publish 2011 full-year earnings on Feb. 27, reported losses on consumer loans in the U.S., the result of its acquisition of subprime mortgage lender Household International in 2003.

Profit Falls

Pretax profit at its investment banking unit fell 53 percent to about $1 billion in the third quarter of 2011 from a year earlier, the lender said Nov. 9. Bad loan provisions increased to $3.89 billion from $3.15 billion, an increase HSBC attributed to its U.S. unit. Higher-than-expected losses in the U.S. are among the risks to the lender’s ratings, Fitch said.

The 23 basis-point gap between HSBC’s submissions for three-month dollar Libor and the composite rate compares with a record 27 basis points on Jan. 23. The difference has expanded from less than one basis point as recently as May.

HSBC’s quote for dollar Libor contrasts with those in currencies such as the euro, where it’s in the middle of the pack with a figure of 0.935 percent, and the pound, where at 0.9 percent it posts the joint second-lowest rate after Deutsche Bank (DBK).

Bond Performance

HSBC’s submissions also aren’t reflected in the bond market. The extra yield over benchmarks that investors demand to hold HSBC’s debt widened 18 basis points, or 0.18 percentage point, to 281 basis points since Aug. 22, according to Bank of America Merrill Lynch’s Global Corporates, Banking index. That compares with a six basis-point tightening to 264 on Credit Suisse debentures and a 13 basis-point drop to 225 for JPMorgan notes.

The cost to insure bonds issued by HSBC using credit- default swaps has increased 54 percent to 135 basis points since the end of July. Swaps on JPMorgan rose 22 percent to 117 basis points, while contracts tied to Credit Suisse’s debt increased 51 percent to 152 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros ($13.3 million) of debt for five years is equivalent to 1,000 euros a year.

Libor is a benchmark for securities with a floating rate of interest, from mortgages in the U.K. to interest-rate swaps. A change in the gauge of even one basis point can affect millions of dollars of payments.

Libor Probe

UBS AG (UBSN), the biggest Swiss bank, is cooperating with authorities investigating the alleged manipulation of Libor, a probe which is likely to renew calls for an overhaul of how the benchmark is calculated. Following its disclosure that employees colluded to rig the rate, regulators in Canada alleged that banks communicated with each other and through brokers to manipulate yen Libor.

Britain’s Financial Services Authority is investigating “significant cross-border allegations in regards to Libor,” while the U.S. Justice Department has subpoenaed banks.

The current probes aren’t the first. At the height of the financial crisis in 2008, there were complaints that panel members may have submitted inaccurate information for Libor and that their rates didn’t reflect borrowing costs. That prompted ICAP Plc (ICAP), the biggest broker of transactions between lenders, to bring in the New York Funding Rate as an alternative.

Libor rates are “completely false markets nowadays,” said Mark Ostwald, a strategist at Monument Securities Ltd. in London. “They reflect a market which isn’t really a market at all. Libor rates are only indicated, not transacted. That’s a fundamental problem.”

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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