Our analyst believes that the market may be disappointed by the investor day, as HSBC may only set up a framework for how it intends to evaluate the issue of domicile change in the medium term. Recent share price performance at HSBC has been driven to a large extent by the potential for restructuring in the medium term, particularly around domicile (helping to reduce the UK bank levy) and business exits (offloading low return businesses or value crystallisation in higher return areas).
Regarding domicile, HSBC would clearly benefit from a reduced UK bank levy by being headquartered in another country. Our analyst expects a group levy of around USD1.5bn in 2015, with only c50% of this relating to the UK bank. This provides HSBC with the opportunity to reduce its cost base by around USD750m before any offsetting measures introduced by the UK Treasury to recoup such losses. Capitalised at 10 times, this suggests value creation of around USD7bn–8bn (already priced in by the market in his view).
While other issues besides the bank levy are clearly important, such as Asia’s long-term growth profile versus the rest of the world and/or the restrictive compensation arrangement applied to global banks headquartered in the EU, we believe HSBC will choose to remain headquartered in the UK for now. Even if a decision is taken to leave it might take several years to get the necessary approvals and complete any relocation. While there are clear income statement benefits to relocating, there are many reasons not to do so. Not least that it is unclear whether the HKMA will (either immediately or after a period of time) decide to increase the bank’s systemic buffer. At the moment, Hong Kong Shanghai Banking Corporation is allocated a 2.5% DSIB buffer – the same as the group – based on total assets of USD887bn. But the group balance sheet is considerably larger at USD2,670bn and the HKMA has the ability to impose a 3.5% DSIB where appropriate. Every additional 50bp charge, assuming a cost of equity of 11% and capitalising at 10 times, would equate to value destruction of around USD7bn.
The “Human Capital” risk is also great for a group of this size (retention of current employees, pool of talents). It is also likely to be a strong deterrent against any move for HSBC’s top executives. So, against the backdrop of the recent general elections in the UK, we would expect the bank to intensify negotiations with the British government in order to soften the taxation system. The Tory victory is a good start.
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