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TLAC costs to weigh on HSBC's NIM as issuance of compliant debt grows

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TLAC costs to weigh on HSBC's NIM as issuance of compliant debt grows

's net interestmargin is set to suffer from increasing debt-servicing costs as the bank stepsup its issuance of bonds eligible to be classified as total loss-absorbingcapacity capital, executives said May 3.

"InMarch we sold $10.5 billion equivalent of TLAC securities in U.S. dollars andeuros across five separate tranches in a range of maturities," CEO StuartGulliver told analysts on a conference call organized to discuss the bank'sfirst-quarterearnings. "This was the largest senior unsecured fundraisingby a bank since 2008."

The volume of issuance in the second quarter will be similaror even slightly larger, according to CFO Iain Mackay.  

Butthe new breed of bonds, designed to be written down as backup capital in caseof financial trouble, comes at a higher price for banks in terms of couponpayments and HSBC's net interest margin will suffer as a result.

"Thecosts of issuing that paper, which we described on numerous occasions before assurplus to our requirements, will create a bit of pressure on the NIM,"Mackay said.

In anote to investors distributed after the earnings release, CreditSights analystswrote that HSBC is expecting an impact of as much as $800 million on netinterest income, equivalent to about 2.5% of its NII for 2015. For the firstquarter of 2016, the bank's NII totaled $7.91 billion, down from $8.06 billionin the prior quarter and $8.27 billion a year ago.

Mackaydenied having been urged by regulators to issue more Additional Tier 1 bonds,also known as contingent convertible or CoCo bonds, but said HSBC will issuethis type of bond in the second quarter.

"Wewould expect to be out in the market this quarter for AT1s, Tier 2s and otherTLAC-qualifying securities," he said.

Overthe next three years HSBC will refinance about $50 billion of maturing extantdebt, and will issue between $10 billion and $30 billion of new bonds in orderto make the bank compliant with TLAC requirements before the 2019 deadline.According to data available to S&P Global Market Intelligence on April 19,HSBC's 2019 target TLAC ratio is 23.6%.

"Currentlyour view is to get as much of a jump on that in 2016 as we can, provided themarket conditions are reasonably supportive," Mackay noted.

Europe'sbiggest banks must raise an aggregate total of about €210 billion ofTLAC-compliant debt by 2019, Simon Adamson, an analyst at CreditSights, said ina previous interview.

Meanwhile,compliance costs are set to continue increasing, executives said. A regulatoryand compliance charge of about $700 million was booked for the first quarter of2016 as part of an ongoing program to tighten controls.

"The[compliance] investment cycle continues through 2016 and we will start torealize the benefits of that in 2017," Mackay said.

Thesale of HSBC's Brazilunit, HSBC Bank Brasil SA - BancoMúltiplo, is one regulatory approval away from completion, which isexpected to happen during the second quarter. Successful divestment will add 60basis points to the bank's regulatory capital ratios, Gulliver said. HSBC'scommon equity Tier 1 ratio at the end of March 2016 was 11.9%, flat from 11.9%at the end of 2015.

HSBCreported a decline in first-quarter profit attributable to shareholders of theparent company to $4.30 billion, down from $5.26 billion in the year-ago period.