HSBC Unlikely To Re-Domicile Away From UK: Morgan Stanley

By Mani
Updated on

Despite HSBC announcing a review of its domicile while unveiling its first quarter earnings, Morgan Stanley analysts believe the bank levy methodology could well be recalibrated to discourage HSBC’s departure.

Jackie Ineke and team at Morgan Stanley in their May 13, 2015 research report titled: “European Banks: HSBC Moving?” argue that even if HSBC were to re-domicile, its credit quality should not be impacted.

HSBC exploring move away from UK

As reported by ValueWalk, HSBC and Standard Chartered are exploring the feasibility of quitting London for a new home in Asia after Britain raised a tax on U.K. banks by a third last March.

While unveiling 1Q earnings last month, HSBC CEO Gulliver noted some of the criteria for the review will be detailed on the June 9 strategy day, with the review being completed by year-end.

The Morgan Stanley analysts point out that Gulliver has indicated a variety of UK and EU-based concerns, such as the EU bonus cap, a new Senior Managers Regime and ring-fencing. However, the analysts believe the UK bank levy is a key driver. They point out that on the day of 1Q earnings, HSBC noted that the UK bank levy was ~US$1.1 billion in 2014 and was expected to be ~US$1.5 billion in 2015 without relocation.

Ineke et al. point out that a litany of UK and EU-based regulations has been cited as reasons for considering a move out of the UK, with Hong Kong the most likelingnew home. However, the MS analysts believe as a G-SIFI, HSBC will get caught wherever it is domiciled, with Hong Kong already having designated D-SIFI charges showing it’s no stranger to the concept. Hong Kong’s HKMA has also come out with its domestic SIFI list, with HSBC in bucket 4, or a 2.5% buffer, by 2019.

TLAC won’t be an issue

Focusing on another regulatory arbitrage, the MS analysts point out that though it’s often cited that China has an exemption from TLAC requirements for its banks, all its banks are currently state-owned, which is clearly not the case for HSBC. Moreover, they note it is Hong Kong which has been cited in domicile discussions, not China. They point out that Hong Kong has distinct regulators (HKMA Vs CBRC) with different standards from China.

Ineke and team note Hong Kong already introduced proposals for a western-style resolution regime back in January 2014. HKMA also brought up the possibility of implementing a TLAC framework for Hong Kong banks. Thus, the MS analysts argue that a move to Hong Kong won’t mean any avoidance of TLAC for HSBC.

Though HSBC has indicated that the HKMA has given a positive response to re-domiciling suggestions, the analysts doubt that HKMA would be a less conservative regulator overall. The analysts anticipate the new Conservative government in the UK would be highly unlikely to allow the largest financial institution to depart the country.

The MS analysts point out that the UK government has a levy target of ~£3.6 billion, of which HSBC pays just under 30%. They note a key concern linked to HSBC leaving would be that if the government maintained the same tax target, the levy on the other large banks would increase by 25%. Moreover, if Standard Chartered also left, the levy would be 41%. Hence, they argue that if this is all about the bank levy target, the UK government could look at potentially recalibrating the levy to encourage HSBC to stay.

Ineke and colleagues say that HSBC £5.844% at 113.25 remains their top bond pick, as they anticipate this bond to be called at a make-whole of around 126 in 2022.

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