Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Memo to HSBC: If the bank was ever serious about moving its headquarters to Hong Kong, the arguments in favor have been diminishing fast.

Europe's largest bank started a review in April of whether to uproot from London as the board chafed over tougher regulation, a rising tax burden and the risk that Britain might vote to leave the European Union, a move that would undermine the city's role as a global financial center.

A decision could be announced early this week, according to Reuters, which reported on Sunday that HSBC would impose a hiring and pay freeze this year as it pushes to cut as much as $5 billion in costs by the end of 2017.

Former U.S. Secretary of State Henry Kissinger and Condoleeza Rice, one of his successors, were among international luminaries drafted in to advise on the domicile review, which considered venues from New York to Toronto and Jamaica.

In truth, Hong Kong was always the obvious choice if a change were to happen. HSBC was founded in the city in 1865 (the ``H'' in its name stands for Hong Kong) and was based there until 1993, when it moved its headquarters after buying Britain's Midland Bank.

Asia remained the driver of earnings, contributing 78 percent of pretax income in 2014. Hong Kong, with 22 percent of group assets, alone generated more than 43 percent of pretax profit,  according to Bloomberg Intelligence. Moreover, the city was still the ``gateway to China," as former Chief Executive Officer Michael Geoghegan called it when he decided to move his office there from London in 2010.

Pearl of the Orient
Hong Kong contributed more than 40 percent of HSBC's pretax income in 2014 ($)

How the landscape has changed. Being the gateway to China isn't what it used to be, with the world's second-largest economy growing at its slowest pace in a quarter of a century last year, the stock market crashing (having peaked two months after HSBC announced its review), and bad loans climbing.

Things aren't looking so hot in the former British colony, either. Consider just the past week. First, the Swiss watch industry said exports fell almost 4 percent, driven by a 21 percent slump in Hong Kong. Then Apple Chief Financial Officer Luca Maestri blamed China's slowdown, ``particularly in Hong Kong" in forecasting the company's first sales decline in a decade. Meanwhile, Daiwa said Friday it would restructure its investment banking operations in Hong Kong.

Confidence in Hong Kong as a business hub that's well placed for China yet separate has also been dented by the case of a bookseller who disappeared from the city amid speculation he had been abducted by mainland agents.

Now consider the other side of the coin. Effectively, HSBC has already won its battle with the U.K. over tougher regulation and higher taxes. In July, Chancellor George Osborne ousted Martin Wheatley as head of the Financial Conduct Authority and said the era of ``ever-larger'' fines for bank misconduct were over. Wheatley's FCA issued a record $2.3 billion of fines in 2014. 

Osborne also caved on taxes, pledging in July to cut the proposed bank levy and apply it only to domestic rather than global balance sheets. (The Bank of England proposed new capital requirements on Friday that effectively complete the post-crisis regulatory regime.)

Granted, Hong Kong remains a more friendly jurisdiction, with a corporate tax rate of 16.5 percent, compared with more than 20 percent in Britain. Against this would be the expense of moving, estimated by Bernstein at as much as $1.5 billion -- hardly the ticket for an institution looking to cut costs.

HSBC had $2.55 trillion in total assets as of the end of September, about nine times the size of Hong Kong's $290 billion in 2014 GDP. While HSBC's front-line regulator would be the Hong Kong Monetary Authority, it's hard to imagine Beijing would remain uninvolved should a bank of such size ever run into trouble.

That isn't a prospect to be relished. Back in April, China's government still enjoyed a reputation for savvy technocratic management. Nine months on, and a botched stock market rescue and currency devaluation later, that stature has been significantly eroded.

HSBC had already changed its tune last year, from planting its flag in China in June with a ``pivot to Asia" plan,  to saying in August that the region would account for just half of assets to be redeployed, with the rest going to Europe and the Middle East.

Changing Tune
HSBC cut back its focus on Asia last year as China's stocks rout roiled global markets

While still HSBC's most profitable region, Asia's contribution to earnings is falling, accounting for just over 60 percent of pretax income in the first nine months of 2015.

A focus on Hong Kong has never seemed so misplaced. This looks to be a decision that has already made itself.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net