HSBC Holdings has finally had enough. The bank is reviewing whether to relocate after the UK bank levy has tripled since inception in a country struggling to bridge its deficit.
The bank levy, an annual tax on banks’ liabilities, has become a strong headwind for the likes of HSBC and Standard Chartered after rising from 0.07% to 0.21% over the past four years.
“We are beginning to see the final shape of regulation and of structural reform, including the requirement to ring fence in the UK. As part of the broader strategic review taking place, 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,” HSBC’s chairman Douglas Flint said at the bank’s AGM on Friday.
Last year StanChart paid $366 million as part of this levy while HSBC paid $1.1 billion – and on a forward earnings basis JP Morgan calculated that this levy would cost StanChart 12% of its profit and HSBC, 9%.
“Management has little to lose. At a minimum, it puts pressure back on policymakers, as a re-domicile of both banks would mean a loss of £1 billion in tax revenues to the UK combined,” said Josh Klaczek, an analyst at JP Morgan Securities.
Based on the budget announced by the UK’s Chancellor of the Exchequer George Osborne the levy could go up to $1.8 billion by 2017. If Labour comes to power in parliamentary elections on May 7 the 2017 levy is likely to be closer to $2.2 billion.
A move to Hong Kong would eliminate the need to pay more than 75% of the levy. That is almost a $1.4 billion boost to earnings; at a conservative 10 times that is $14 billion in value, calculated Chirantan Barua an analyst at Bernstein.
HSBC's review of its domicile was previously conducted every three years but had been postponed since 2013.
Welcome mat
Hong Kong is the most likely alternative location to London. Asia, and within it particularly Hong Kong, is the key return generator at HSBC with an ROE of about 20%.
The cost of HSBC redomiciling from the UK to Hong Kong should not be more than
$1.5 billion estimated Bernstein's Barua, mostly around relocation and attrition costs of staff as well as changing legal jurisdiction of debt and equity products and potential exit costs with regards to real estate. Not a lot given the potential upside.
Some analysts disagreed it would be such an easy calculation saying the complexity of moving and size of HSBC’s balance sheet would mean nothing would happen quickly.
“We see this as still a distant prospect,” said Goldman Sachs.
The size of HSBC will be daunting for Hong Kong. The bank has $2.6 trillion of assets and is 3.6 times the size of Standard Chartered.
HSBC and StanChart’s assets are materially higher than the GDP of HK and Singapore at $290 billion and $308 billion respectively. In Singapore, the big 3 banks DBS, OCBC, UOB have combined assets of just $867 billion.
Moreover, Hong Kong is no pushover when it comes to taxation, capital buffers and regulation.
The HKMA has the Countercyclical Buffer, which is likely to rise to 2.5%, as well as riskweight floors, which it recently increased on all mortgages.
However Hong Kong’s regulator appeared all for the move: “The HKMA takes a positive attitude should HSBC consider relocating its headquarters back to Hong Kong. HSBC is the largest bank in Hong Kong and has deep historical links with Hong Kong."
The regulator will be comforted by the fact that HSBC has capital levels almost 50% above the levels it was before 2007.
If the bank does decide to move to Hong Kong it will need the blessing of the Chinese government especially given the fact that the bank is playing a major role in the internationalisation of the RMB.
The only area where there could be a concern is in counterparty businesses in transaction banking. Analysts questioned whether US pension funds would be comfortable with custody mandates to a bank domiciled in China; or with cash management for large US corporates.
