December 8, 2013 11:59 pm

HSBC prepares to leap the Vickers ringfence

U.K. Banks As Employment Cut To Nine Year Low©Bloomberg

Sir John Vickers has largely disappeared from view since publishing the final report of his Independent Commission on Banking a couple of years ago. The waves he made with his central idea of ringfencing – making big banks erect special safeguards around their retail banking operations – have subsided.

Until now. As the UK Banking Reform Bill, which enacts the Vickers recommendations, is about to complete its passage through parliament, one of the first tangible signs of a bank’s response has emerged.

By the numbers: HSBC

By the numbers: HSBC
Profits before tax

News that HSBC is considering spinning out its UK operation is a logical extrapolation of the ringfencing requirements, bankers say.

“Given the trouble you have to go to to establish a self-contained operation, with its own capital and governance, you might as well go the whole hog and spin it off,” says one seasoned executive who knows HSBC well.

For HSBC, spinning off a UK subsidiary should be less convoluted a process than it might be for other big banks, such as Barclays or Royal Bank of Scotland. “The world’s local bank”, which operates in 80 countries around the world, is already structured as a string of country-based subsidiaries.

There would still be work to do, nonetheless. The group’s main UK subsidiary, HSBC Bank PLC, is a lot broader in nature than a ringfenced bank would be – it contains investment banking operations that would not be allowed within a ringfence and also houses some continental European business.

Of the £2.3bn of pre-tax profit the unit generated in the first six months of the year, about half came from operations that could sit within the ringfence. This suggests a reconfigured floated bank – valued at 10 times earnings – could be worth about £20bn.

Up to now – despite HSBC’s regional subsidiary structure – the group has tended to wholly own its businesses around the world. The exception thus far has been Hang Seng, the 62 per cent-owned Hong Kong subsidiary that HSBC partially acquired when it bailed out its ailing Asian rival nearly 50 years ago.

But that is an accident of history. And in contrast to some rivals, notably Spain’s Santander, the idea of HSBC deliberately bringing outside investors into a locally listed subsidiary is untested.

Bankers say that even if the UK flotation plan is pursued, it would be unlikely to signal a change of global strategy and would simply be a pragmatic strategic response to local rules.

Being organised as a global network of subsidiaries, whether listed or not, chimes with the mood of regulators in the aftermath of the financial crisis and their desire to trap capital and liquid resources within a legal local entity in case of problems.

Adding a local stock market listing gives an entity more flexibility to raise fresh capital in that location if necessary. That might be useful for HSBC in the UK, if British regulatory capital demands continue to outstrip other locations in the world. Though this would really only apply if the broader group were to move elsewhere – a scenario that bank insiders insist is not on the cards.

A year or two ago, HSBC and its emerging markets-focused UK rival Standard Chartered were both vocal about the disadvantages of being based in Britain. Regulatory capital and liquidity demands in the country are higher than average, there is a costly tax on banks’ balance sheets and politicians have appeared to encourage populist “banker bashing”.

Although the political sniping has abated, the financial burdens have not. Last week, in fact, the government increased once more the rate of the balance sheet levy – a tax that already costs HSBC £900m a year.

Some investors believe a bank like HSBC should be seriously considering relocating to Hong Kong, its other big market. “We try to get them exercised about it,” says one big shareholder. “But these days they don’t rise to the bait. They seem to have done some kind of peace deal with the government.”

Santander has led the way in bank spin-offs

For HSBC, the decision to consider a separate listing for its UK operations may mark a radical departure. Yet for Banco Santander, the Spanish retail banking group, it has become almost a way of life.

Over the past four years, Santander has listed swaths of its far-flung banking empire on local stock markets, helping to bolster the group’s capital at a time of severe financial stress in its home market.

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Whatever the reason – political appeasement, the reality of the costly upheaval that relocating headquarters would entail, or the reluctance of most major economies to become the ultimate guarantor of a giant bank – HSBC seems anchored in the UK for the time being at least.

In the spring, the bank said the idea of shifting the group’s domicile to Hong Kong was “off the table”.

Now all it needs to do is decide whether the hassle of carving out and floating a UK subsidiary is worthwhile.

Other banks are queueing up to list UK lenders, too. Aside from the two divestments demanded of the part-nationalised lenders – Lloyds Banking Group (TSB) and RBS (Williams & Glyn’s) – Virgin Money and Santander UK may also float.

As with Lloyds and RBS, which will float brands they acquired decades ago, HSBC would essentially be bringing back to market the Midland franchise it bought more than 20 years ago. Any thought of whether the brand would be revived is probably premature but retro branding certainly fits with banks’ attempts to signal a return to old-fashioned pre-boom-and-bust values.

All the signs are that there would be ready buyers of any stock that mimics the UK focus of Lloyds, the country’s leading high street lender, whose shares are up 70 per cent over the past year.

“One reason why Lloyds shares have appreciated so much is that there is no other real pure-play UK bank to buy at a time when the British economy is bouncing back,” says one leading asset manager. “HSBC UK would be a good alternative.”

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