While Urquhart Stewart, head of corporate development at Seven Investment Management, believes that HSBC’s decision to embark on a series of restructuring iniatives including offloading 8,000 UK staff and reducing client-facing and legacy risk-weighted assets by $130bn net by 2017, makes sense in business growth terms, he said unless the UK government introduces a more accommodative environment, other foreign banks could also relocate.
“HSBC’s headquarters may not move to Asia, but that is the next growth area of the business and will certainly be the next area of investment,” he said.
“Asia is the financial growth area of the world at the moment, and other overseas banks are likely to follow suit. For example, Standard Chartered has very little UK footprint other than being branded under the British flag, and could likely move.”
“A lot of it is down to the bank levy, which, after everything that has happened in the UK, was the cherry on the icing on the cake,” said Urquhart Stewart. “HSBC had probably already been considering splitting the bank and looking at Hong Kong, then the levy happened and they will have said ‘why do we have to pay that?’.
Implemented in 2011, the bank levy is an annual tax on all UK bank debts that is designed to discourage the types of risky borrowing that was cited as a key factor in the 2008 market crash.
However, while the levy rate was 0.05% upon its introduction, it has since increased to 0.21% – a figure that is viewed by the sector as detrimental to the UK’s reputation as a business destination for global banks.
“There is every reason why HSBC could move, but there are regulators in Hong Kong as well, so they are not going to get an easier ride as such.”
Reverting to type
Urquhart Stewart said that although there is a good chance of HSBC retaining its UK base, it will most likely be under a different business model that could see a reversion to that of Midland Bank, which was bought by HSBC in 1992.
“They are very likely to split the bank – not just commercial and investment, but split the British and international sides,” he expanded. “HSBC has already started to move some its operations to Birmingham, which is of course the old headquarters of the Midland Bank. Midland was a better domestic bank than HSBC, so I would not be at all surprised if they move the UK headquarters there and rebrand as Midland Bank.”
Making them feel at home
Since the financial crisis came to a head in 2008, banks have borne the brunt of both public and political ire, with more stringent regulatory measures and a series of multi-million pound sanctions effectively serving as retribution for a market crash which was widely-viewed as the result of irresponsible banking practices.
However, with Chancellor of the Exchequer George Osborne due to make his Mansion House address on 10 June, Urquhart Stewart sees the threat of losing Britain’s largest bank as a potential watershed moment for the UK banking sector.
“The whole banking sector is under a dark cloud at the moment, because people can’t see past the politicians and regulators beating them up,” he said. “Populist politicians see banks as the financial cash cow for every time they want to raise money. But now that the Chancellor has five years of power, he does not necessarily need those populist measures anymore, and will become more measured in his tone.
“We have the Mansion House speech tomorrow, in which he will certainly be changing his tone towards the City. He will talking about its strength and value, and changing the tone in terms of bank levies and, as it were, beating up the bankers.
“Osborne does not want HSBC to move its flag out to Hong Kong and will be doing his damnedest to get HSBC to stay, which may even include delaying or adjusting the levy.”
However, while Urquhart Stewart’s words may whet investor appetites for a spree of banking sector investments, he added that any changes announced in the Mansion House speech will take time to be priced into the market.
“While we should get something which will encourage banks to stay, bank share prices will still be under the cloud of where the next regulatory compensation claim is going to come from. It is a bit like nailing down floorboards – as soon as Osborne nails one down, another seems to pop up. Until the market is clear that there will be no more levies and huge fines it will still have that cloud over it – the cloud will pass, but it may not be yet.”
