The privatization of Hang Seng will trigger a wave of corporate bankruptcies

On Thursday, HSBC and Hang Seng Bank announced via a press conference release that HSBC would privatize Hang Seng Bank before the market opening. a move that would reshape the banking industry. HSBC will offer to repurchase Hang Seng shares at a 30% premium to its closing price on Wednesday. The total costs are estimated at HK$106 billion. 

In Hang Seng's June financial report, it revealed its loan default ratio had risen to 6.69%, and the market expected this ratio to rise again by the end of the year. To prevent further deterioration of this ratio, HSBC decisively proposed to privatize Hang Seng at a high premium, effectively making early provisions for Hang Seng's credit defaults. 

According to the announcement, the privatization process was expected to be completed early next year. Now that provisions have been preparing to be made, the commercial real estate loans, which comprise the largest portion of Hang Seng's bad debts, will inevitably be accelerated to make provision before the end of the year. With these provisions in place, Hang Seng will certainly take determined action against the defaulting debtors. Before the privatization announcement, some debtors paid only interest, and the others may even be inability to pay interest, but they could still be easy going. From now on, Hang Seng will swiftly take possession of debtors' properties and even file the debtors' companies for liquidation/bankruptcy.

In order to minimize the negative effect on market sentiment, the ultimate action will be taken after the privatization process is completed. This will avoid the need to disclose details of defaulting companies under listed company regulations. Additionally, it will prevent embarrassment for HSBC and Hang Seng and undermine market confidence. Therefore, starting early next year, the queues of filing the defaulters for bankruptcy will be raised immensely. 

If HSBC does not privatize Hang Seng, more news about bad debts provision will gradually emerge before the end of this year, exerting a heavy blow to Hang Seng's share price and HSBC's reputation. A 30% to 40% drop in Hang Seng's share price is likely. Add to that credit impairment loss, the total losses will undoubtedly exceed HK$ 100 billion spending on privatization.