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0005 / HSBC's "Bad Bank" + FY 2019 Results

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  1. #1

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    0005 / HSBC's "Bad Bank" + FY 2019 Results

    For current investors of 0005 - how does this whole HSBC "bad bank" thing work?

    Seen this on various aggregator sites and it has made its way to AAStock

    HSBC Holdings HSBC, -1.01% HSBA, -0.92% is considering a potential merger of two of its biggest divisions, as well as the creation of a "bad bank" to house billions of dollars of unwanted assets and businesses, MarketWatch sister publication Financial News reported, citing unnamed people familiar with the situation. HSBC declined to comment to the outlet. The bad bank could house between $150 billion and $250 billion in assets, including global banking and markets assets, as well its French retail unit and Turkish operations, the report said.
    A bad bank is a corporate structure which isolates illiquid and high risk assets held by a bank or a financial organisation, or perhaps a group of banks or financial organisations.[1] A bank may accumulate a large portfolio of debts or other financial instruments which unexpectedly increase in risk, making it difficult for the bank to raise capital, for example through sales of bonds. In these circumstances, the bank may wish to segregate its "good" assets from its "bad" assets through the creation of a bad bank. The goal of the segregation is to allow investors to assess the bank's financial health with greater certainty.[1] A bad bank might be established by one bank or financial institution as part of a strategy to deal with a difficult financial situation, or by a government or some other official institution as part of an official response to financial problems across a number of institutions in the financial sector.
    https://en.wikipedia.org/wiki/Bad_bank

  2. #2

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    It works by letting you know to prepare for some bad news.

    With the previous Group and Asia CEOs departures and now the situation in Greater China, HSBC is in for a really really rough ride to come. This is an attempt to ring fence the bank and also avoid regulatory constraints that would normally apply.


  3. #3

    I was wondering the same thing.

    Maybe because HSBC is rejecting a lot of clients or shutting them off they create the 'bad client' list to offer them a 'bad bank'.

    Any other thoughts?

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  4. #4
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    From the attached article: "The main goal of segregation of the non-performing loan for the other loan is to allow the investors to know the financial health of the bank with a greater level of certainty."

    https://www.wallstreetmojo.com/bad-bank/

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    @traineeinvestor - the article raises far more questions in my mind than it answers.

    Main one is - typically how does the company that "buys" or gets the bad assets finance its purchase and/or operations? Where do the employees of the bank who are managing / operating the bad bank go? i.e. Where does the payroll / op-ex go?

    Never thought I'd have to research this ... all good in terms of new knowledge which will probably never be of any use again in life - hopefully.


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    This article has some practical info ..

    Grant Street National will sell $425 million to $450 million worth of high-yield, “junk bonds” underwritten by Drexel Burnham Lambert Inc.
    https://www.latimes.com/archives/la-...302-story.html

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    Yes, I get its old ... BUT that was the example given in the Wiki article. 1988 1B ... today's 100-250B.

    But is the underlying approach the same?

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    Quote Originally Posted by shri:
    @traineeinvestor - the article raises far more questions in my mind than it answers.

    Main one is - typically how does the company that "buys" or gets the bad assets finance its purchase and/or operations? Where do the employees of the bank who are managing / operating the bad bank go? i.e. Where does the payroll / op-ex go?

    Never thought I'd have to research this ... all good in terms of new knowledge which will probably never be of any use again in life - hopefully.
    You are getting too operational.

    Think more of what a Finance team does when it comes to reporting. It's somewhere convenient to report what they don't want to.
    shri, TheBrit and AsianXpat0 like this.

  9. #9
    Quote Originally Posted by shri:
    @traineeinvestor - the article raises far more questions in my mind than it answers.

    Main one is - typically how does the company that "buys" or gets the bad assets finance its purchase and/or operations? Where do the employees of the bank who are managing / operating the bad bank go? i.e. Where does the payroll / op-ex go?

    Never thought I'd have to research this ... all good in terms of new knowledge which will probably never be of any use again in life - hopefully.
    Short answer: there isn't a short answer

    Slightly less short answer: there are a number of ways to do this. Sometimes the bad bank is ring fenced within the good bank, sometimes it is spun off into a separate entity with new capital being raised from the bank's own shareholders, sometimes it is spun off as a distribution in specie with no new capital raised, sometimes the bad bank is sold to outside investors.

    What happens to the employees will depend somewhat on the structure but sometimes the "bad bank" is just box with no employees etc - like a fund it is managed externally either by existing employees or employees of the purchaser. Of course, if they put a business unit into the bad bank then I would expect the relevant employees to follow.

    There's an article on China's bad bank asset managers here: https://www.ft.com/content/b5cf2fbe-...4-13e067d5072c
    AsianXpat0 likes this.

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    Going on a complete tangent from that FT article and a couple of other's I read about China's bad banks....

    NPLs showing up on Taobao is something new...

    https://macropolo.org/cleanup_analys...an-china-data/

    found after a search based on some info in this WSJ blog (not paywalled)

    https://blogs.wsj.com/chinarealtime/...-looking-good/

    jack55 likes this.

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