In the run-up to last week’s election, with the prospect of a Labour win looming, HSBC (LSE: HSBA) and Standard Chartered (LSE: STAN) both announced that they were considering moving their headquarters outside the UK.
But, even though a business-friendly Tory government is now in control of the country, HSBC and Standard could still move away.
Land of opportunity
There are several good reasons why both Standard and HSBC could still be considering a move away from the UK.
For example, HSBC generates around 80% of its profits in Asia, so it would be easier for management to keep an eye on operations by moving its headquarters to Hong Kong. Standard, on the other hand, has no retail banking operations here in the UK. So, on an operational basis, it’s starting to make sense for both banks to move back to Asia.
HSBC was forced to move its headquarters to the UK in 1992 in return for permission to buy Midland Bank. Standard has always considered it a strategic advantage to keep its headquarters in London, a hub of international finance. Lower funding costs and a favourable business environment have been cited as two key reasons for remaining in the country.
However, according to insiders, being domiciled in the UK has started to become more of a burden than a benefit for both banks. Funding costs have increased; taxes have risen, and a tough regulatory environment has cost the banks billions in fines. There’s also Europe’s new bonus cap to consider, which could give Asian rivals an advantage in hiring people.
Additionally, high capital requirements and extra compliance costs have depressed return on equity.
The cost of doing business
HSBC and Standard are also being unfairly punished by the UK’s bank levy, which was initially a temporary tax, but now looks as if it’s here to stay for good.
The bank levy is calculated as a percentage of assets on the global balance sheets of UK domiciled banks. This system makes sense for the likes of RBS and Lloyds, which conduct the majority of their business here in the UK. But for HSBC and Standard, it makes no sense to continue paying tax on overseas assets, which don’t contribute to UK operations.
The bank levy cost HSBC around £700m last year, more than any other bank in the UK. It’s estimated that the levy could cost the bank £1.2bn per annum by 2017.
And management has linked the increasing cost of the levy to the dividend, stating that without the tax, the bank would be able to hike its dividend payout by 5% to 10%.
Analysts have calculated that by moving away from the UK, Standard could lift its return on tangible equity — a key profitability measure — by 1.6% to 12.7%. This would save the bank a few hundred million dollars a year.
The bottom line
On balance, it’s certainly becoming tougher for banks to do business over here and there are many factors that could push Standard and HSBC away from the UK, even after the Tory win.
Still, broadly speaking, if Standard and HSBC did move away from the UK, investors would benefit. Lower costs would boost returns on equity, earnings would increase, and, for the most part, it would be business as usual for the banks.
Moreover, without the levy weighing on profits, HSBC and Standard would be able to return more cash to investors.
