It was 1992 when the Hong Kong and Shanghai Banking Corporation burst on to the UK banking scene by taking over Midland bank. It was an audacious bid that not only put HSBC on the map in Europe but forced the bank to relocate its head office from Hong Kong to London.
Almost a quarter of a century later, Britain’s biggest bank is considering whether to migrate once more and move its head office from its 50-storey tower in Canary Wharf.
The bank, which has a foothold in 70 countries and employs 266,000 peopleincluding 48,000 in the UK, is likely to consider several factors in determining whether London is a better location than, say, Hong Kong or Sydney. Its shares jumped on Friday when the review was announced, and continued to rise on Monday, pulling Standard Chartered – the London-based, Asian-focused bank – along too. In Hong Kong, where HSBC’s shares are also listed, daily trading volume was the second highest recorded.
But, while the share prices may be jumping, there is also some scepticism in the City about the prospect of HSBC moving its head office, at least in the next five years.
Analysts at UBS said the possibility of such a move by either HSBC or Standard Chartered was unlikely in the short term. “We attribute the rationale for statements in this regard as being more a reminder to UK politicians ahead of the UK election than a message of serious intent.”
Here are the factors at play in HSBC’s decision on whether to relocate.
The bank levy
George Osborne’s bank levy is on the size of banks’ balance sheets, regardless of whether the assets and liabilities are located in the UK. The burden falls heaviest on HSBC, which paid $1.1bn (£700m) to the exchequer in 2014 and as a result of a rise in the levy announced by the chancellor in his budget, it could reach $1.4bn. Analysts at UBS calculate this is equivalent to 6% of pre-tax profits. HSBC points out that 58% of the levy it pays does not relate to its activities in the UK.
HSBC’s contribution is approximately a quarter of the annual proceeds from the levy, which was introduced after taxpayers bailed out banks during the financial crisis.
The requirement for banks to ringfence their high street operations from their investment banking arms is another fallout from the 2008 banking crisis. The rules come into force in 2019 and in anticipation HSBC has announced it will move 1,000 staff to Birmingham – the old base of Midland bank – to run the retail and business banking operation inside the ringfence.
Stuart Gulliver, the bank’s chief executive, told the annual general meeting last Friday that the location in Birmingham “underlined our commitment to communities throughout the UK and brings our ambition of becoming the bank of choice in the UK a step closer”.
Even so, speculation is rife that HSBC could spin out the retail business. Speaking on the sidelines of the bank’s AGM, HSBC non-executive director Sir Simon Robertson told reporters that the ringfenced bank would become little more than an equity investment once the Vickers rules kicked in, because of the lack of direct control. “It changes the dynamics,” said Robertson.
Analysts at Credit Suisse calculate that if HSBC were to spin off the UK arm it would “give up a significant source of earnings”. “As such, we expect a full UK separation would dilute returns,” they said.
A clampdown on wrongdoing
New rules which reverse the burden of proof in bank collapses, by requiring senior bankers to prove their innocence, may also have an influence. A new authorisation regime in the City is also putting more emphasis on the responsibility of senior individuals running banks.
A possible EU referendum
Douglas Flint, chairman of HSBC, told investors at the AGM: “One economic uncertainty stands out, that of continuing UK membership of the EU.”
This could become clearer for HSBC after the general election because the Conservative party has promised an in-out referendum, so this uncertainty will be settled before the outcome of the headquarter review.
On the sidelines of the AGM, Flint insisted the review of the headquarters was not driven by politics. “How other people interpret it is up to them,” he said.
Strategy review and regulatory overhang
On 9 June, a month after first-quarter results, Gulliver will present the outcome of a strategy review. Investors are looking for an update on underperforming parts of the business: the US, Mexico, Brazil and Turkey.
Gulliver has already pulled HSBC out of 14 countries since taking the helm in 2011. But, despite his mantra of running the bank with “courageous integrity”, he has been embroiled in the scandal in the bank’s Swiss arm. The Guardian and other publications published details of leaked accounts showing how the bank had helped customers avoid and evade tax.
Addressing shareholders at the AGM, Gulliver emphasised that the bank was subject to a deferred prosecution agreement with the US Department of Justice as a result of the £1.2bn fine in 2012 for money laundering offences.
There are suggestions that the close oversight of the US authorities under the agreement could affect whether other jurisdictions will welcome HSBC. The Hong Kong authorities, however, have said they would look favourably upon a return of HSBC. Even so, the UBS analysts said: “Although Hong Kong is an obvious head-office location for HSBC and Standard Chartered, the issue will come down to the size of both banks relative to Hong Kong GDP and the broader role of Hong Kong versus Shanghai in terms of the longer-term positioning of the Chinese financial system.”
A counter argument is that HSBC has been designated, in regulatory jargon, a global systemically important financial institution. This means that it is holding a bigger capital cushion than it did before the 2008 crisis, which is intended to reduce the need for one of the world’s biggest banks to rely on government support. This is probably a relief to the Hong Kong authorities, given that HSBC’s balance sheet is nine times the size of the territory’s GDP.
This article was written by Jill Treanor, for theguardian.com on Monday 27th April 2015 16.39 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010