Britain’s bank tax jump threatens to push banks to new home

HSBC and Standard Chartered are looking at the viability of quitting London for a new home in Asia because a big jump in a tax on UK banks makes staying in Britain increasingly painful, reports Reuters.

Several investors told Reuters they want the two banks to do a thorough analysis on whether it makes sense to move after Britain raised the bank tax by a third last month.

Some are expected to quiz bosses on it at shareholder meetings, including at an investor gathering in Hong Kong on Monday.

“There is a very clear risk that HSBC and StanChart reach a pain threshold where they think it is no longer worth staying in the UK,” said Richard Buxton, head of equities at Old Mutual Global Investors, which owns HSBC shares and who said the bank was reflecting on a move.

The tax has increased eight times since being introduced in 2010 to ensure banks make a “fair contribution” after the financial crisis. The latest rise was seen as a popular move ahead of Britain’s May 7 election.

Aberdeen Asset Management, the second biggest shareholder in Standard Chartered, with an aggregate 9.4 per cent stake, said the bank should consider the option.

Senior management are already assessing the situation, people familiar with the matter said. Four years ago, HSBC said it would review its domicile in 2015, although the bank declined to comment if or when any review might occur.

“It’s a live conversation internally because it’s an issue being raised by investors and sell-side analysts,” said a person close to one of the banks, who asked not to be named as the discussions are private.

The banks, who make most of their profits in Asia, face a combined $2 billion bill this year under the annual UK bank tax, up from US$1.5 billion last year and almost double what they paid in 2013.

The opposition Labour Party plans to increase it by 800 million pounds to 4.5 billion pounds (US$6.8 billion) a year for the banking industry as a whole, if it wins power, to pay for childcare for three and four year olds. Labour is neck and neck with Prime Minister David Cameron’s Conservatives in polls.

Another hefty rise could be the final catalyst and force banks to move, Bernstein analyst Chirantan Barua said.

HSBC, which has described the levy as a tax on staying in London, faces a bill of US$1.5 billion this year, about seven per cent of expected profits. Standard Chartered is set to pay US$500 million, or about nine per cent of earnings.

“Too many moving parts”

HSBC says it has two “home” markets, Britain and Hong Kong. It moved from Hong Kong to London in 1993 when it bought Midland Bank and its most likely move would be back to its former home, one of the few places that could handle its US$2.6 trillion balance sheet.

The bank began life in Hong Kong 150 years ago, with roots as a financier of trade between Europe and Asia. It issues most of the territory’s bank notes and has made US$24 billion in profits there over the last three years, compared to a US$4 billion loss in Britain over the same period.

London has been home to Standard Chartered since it was formed in 1969 and its most likely new home would be Singapore, from where most of its businesses are already run.

Analysts said the cost of moving could be between US$1.5 billion and US$2.5 billion per bank.

HSBC told UK lawmakers in February, before the levy increase, the best location was still Britain. It had postponed a review in 2011 because Chief Executive Stuart Gulliver said there were too many moving parts to make a rational decision.

Industry sources said that could still be the case for both banks. They are trying to improve profitability, cut costs, sell businesses, deal with old misconduct issues and simplify. Standard Chartered also gets a new CEO next month, Bill Winters, who may want to raise capital.

“On a 10 or 15 year view, I’d be surprised if both of them are still here. But I don’t think it’s an issue for the short-term, they have bigger priorities,” John-Paul Crutchley, UBS banking analyst, said.

Yet it could be worth it. JPMorgan analyst Raul Sinha estimated the higher UK bank levy will cut Standard Chartered’s earnings by 13 per cent in 2017, while a move away from Britain could lift its return on tangible equity, a key profitability measure, by 1.6 percentage points to 12.7 per cent.

Britain is also forcing banks to separate domestic retail operations by 2019, so if HSBC is serious about moving, it could spin off its UK business at the same time, analysts said.

But the complexity of all the issues in the mix make a decision difficult. These include Europe’s pay rules for staff, the risk of losing staff, how capital and leverage rules in places like Singapore compare, access to capital, political stability, credit ratings and the risk of regulatory change in any new jurisdiction.

Britain’s strongest card is London itself, which has always ranked alongside New York as the most attractive global financial hub, in the Z/Yen Global Financial Centres index.

Banks, accused of sabre-rattling with threats to quit before, are also wary of stepping into a political minefield.

“StanChart and HSBC might well be firing warning shots on their possible relocation to … tell politicians they won’t be bullied,” said Paul Mumford, senior investment manager at Cavendish Asset Management, which owns stock in both banks.

“But I think unless these firms start feeling that some politicians are in tune with what they offer the UK, then we might see genuine action … the threat is there,” he said.