HSBC looks to leave troubles behind

Back in 2013, when HSBC suspended its traditional practice of holding a triennial review of where it should be based, the bank's official explanation was rational enough.

The regulatory environment, in the wake of the financial crisis, was going through such change that there was no point wasting time on domicile reviews.

At least five issues were up in the air. HSBC's home regulator was changing from the now-defunct Financial Services Authority to the Bank of England. UK rules on ringfencing banks' high-street operations and Europe's CRD4 rules on capital were being thrashed out. New bonus restrictions were looming. And the UK's balance sheet levy was in flux.

But on Friday, chairman Douglas Flint told the bank's annual shareholder meeting in London that a new era had arrived: "We are beginning to see the final shape of regulation and of structural reform … The board has therefore now asked management to commence work to look at where the best place is for HSBC to be headquartered in this new environment."

But there is more than mere regulatory clarity behind the bank's decision to revive the threat of leaving London.

Over the past few years - while it has been silent on the issue of relocation - it has been through a string of scandals (Swiss tax dodging, Mexican money laundering, global sanctions breaches, insurance mis-selling, foreign exchange manipulation).

That, combined with a partly related fall-off in profitability and a struggling share price, have piled pressure on Stuart Gulliver, chief executive, to think more radically. At a strategy day on June 9, he is expected to unveil a more dramatic retrenchment from underperforming markets such as Brazil and Turkey. Buttressing that with a domicile move would send a strong can-do signal to investors.

Opportunism is also at work. The timing of the announcement - less than two weeks before a UK general election - looks calculated to play into the political debate about business and finance.

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The current government has been no real friend to HSBC, introducing and repeatedly raising the bank levy - a tax that hits HSBC far harder than any other bank. And the Conservatives pose another big future threat, given that their policy of holding a referendum on EU membership undermines the predictability of London's merits as a European and global hub.

But advisers believe HSBC would have even more to fear from a Labour government, given its plans for new taxes on bankers' bonuses, large property and non-domiciled staff, as well as a higher bank levy.

"A Labour victory would be far worse," says one financial adviser who knows the bank well. "But basically it's a choice between an EU unfriendly party and a business unfriendly party. Why would they stay?"

Chirantan Barua, banks analyst at AllianceBernstein, puts the "opportunity value" of moving at $14bn, based on an annual $1.4bn of cost reductions at a valuation of 10 times earnings. Set against that would be a one-off relocation cost of $1.5bn, Mr Barua says.

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Much of HSBC's tax burden in the UK is not as high as many might imagine. Of its global tax bill on profits, for example, only $69m was paid in the UK last year, compared with $3.6bn group-wide. But the $1.1bn UK bank levy is the real burden. And that is scheduled to rise to $1.8bn under the current government or nearly $2.3bn under Labour plans.

If HSBC moved, the levy would not disappear but a $1.8bn liability would fall to an estimated $600m-$800m, based on the size of the UK, as opposed to the global, balance sheet. However, the shift of domicile could well be accompanied by other moves. The bank has already conducted unofficial soundings with some investors about spinning off the old Midland Bank franchise. It was HSBC's 1993 acquisition of Midland that led to it redomiciling from Hong Kong to London.

On Friday, in a highly unusual statement that boosted the credibility of HSBC's threatened return, Hong Kong's regulator said it would welcome the bank even though its balance sheet is nine times the size of the country's $290bn GDP.

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Analysts said the statement appeared to have been orchestrated to ensure maximum effect for HSBC. Such a welcome would not have been so readily given in previous years, when western banks including HSBC carried far thinner capital buffers than local banks, they said. "Now that their capital is stronger, they no longer present the same kind of systemic risk to a city state like Hong Kong," said one.

The biggest argument against moving may be Chinese political uncertainty - and the resultant nervousness of corporate clients over the warehousing of cash and assets in Hong Kong. But that could be solved by creating legal entities in the UK or US to store client funds, experts said.

For Mr Gulliver, who has family reasons to want to stay in the UK, it will be a head versus heart battle. For now, most investors and analysts seem convinced that the head should win.

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