HSBC Should Say 'Cheerio' to London, 'Hello' to Hong Kong
HSBC is in the final stages of deciding where it hangs its hat. Headquartered in the U.K. for more than two decades, the country's biggest bank is considering a return to its birthplace 150 years ago, when it was the Hong Kong & Shanghai Banking Corp. It should go -- and its smaller London-based colleague Standard Chartered should join it.
Future opportunities for HSBC to expand its consumer banking business are much richer in Asia than anywhere else. As the chief executive of one of Europe's biggest banks told me earlier this year in an off-the-record conversation, demographics drives retail banking -- and the demographic trends unequivocally favor Asia.
By 2030, Asia Pacific's middle class will account for 66 percent of the world's total, up from just 28 percent in 2009, according to figures and forecasts from the Brookings Institution. By contrast, Europe's share will slide to 14 percent from 36 percent in the same period, with the U.S. more than halving to 7 percent from 18 percent:
Those figures suggest that in a bit more than two decades, Asia will produce an additional 2.7 billion affluent consumers eager to become bank customers. More than 1.7 billion Asians will qualify as middle class in less than a decade. For HSBC, which built its business on the slogan of being "The World's Global Bank," those are compelling numbers.
As I've noted before, HSBC already makes a staggering 80 percent of its pretax income in Asia; for Standard Chartered, the figure is about 70 percent. If all you knew about the two banks was where their money comes from, you would struggle to correctly identify where they're based; on a simple revenue basis, they look nothing like their European banking peers:
It's hard to oversee units that are operating on the other side of the world. So if most of your business is already in Asia, it probably makes sense to have your headquarters there, along with almost all of your key decision makers and risk overseers.
But it isn't just the pull of Asia that should compel HSBC to head east. There's also the push away from the U.K., which has been zealous (to say the least) in trying to solve the too-big-to-fail problem with increased regulation of the finance industry. A bank levy on global balance sheets, for example, cost HSBC 750 million pounds ($1.13 billion) last year, more than any other U.K. bank. The tax also absorbed about 9 percent of pretax profit for Standard Chartered, which said in April it's "listening carefully to our shareholders" on whether to relocate.
Looking ahead, HSBC reckons it will cost as much as $2 billion to meet U.K. demands to insulate consumer from investment banking in the coming years. No wonder David Cumming, who controls about 1.06 percent of HSBC's shares as head of equities at Standard Life Investments, the bank's 12th-biggest investor, said on Monday that the bank is at a "competitive disadvantage" because of "ever-increasing capital requirements" in the U.K. "Logically, we would be supportive of a move if they chose to do that," he told BBC Radio 4's Today program.
There's also the uncertainty surrounding Britain's membership in the European Union. Prime Minister David Cameron has promised a referendum by 2017; an October poll conducted by YouGov showed respondents split, with 40 percent in favor of staying in the bloc and 40 percent saying they would vote to quit. HSBC could easily find itself based in England -- not the U.K., and not really Europe -- if the vote favors Brexit and triggers a successful resurgence of Scottish nationalism.
HSBC has already decided to relocate its asset management unit, which oversees about $500 billion, to Asia. "There isn't an obviously dominant Asian asset manager, so we are going to relocate the sort of center of the asset-management business back to Hong Kong from London because we think there's a very big growth opportunity," Chief Executive Officer Stuart Gulliver said in June.
Also bear in mind that Gulliver has only been in charge since January 2011; while the post-crisis landscape suggests a revolving door for CEOs at European banks (Anshu Jain lasted three years at Deutsche Bank, as did Antony Jenkins at Barclays), Peter Sands reigned at Standard Chartered for nine years. There's no reason to suppose Gulliver can't double his time at the helm. And he "considers Hong Kong his permanent home," as my Bloomberg colleague Richard Partington put it in June.
When the headquarters review was unveiled on April 24, HSBC shares jumped almost 3.8 percent on speculation a decision to abandon the U.K. would free up more capital in Hong Kong's less onerous regulatory regime. HSBC initially said it hoped to make a decision on where it wants to be based by year-end. But Chairman Douglas Flint said earlier this month that the timetable may slip: "If we haven't made a decision then because we’re still analyzing information or the board wants more, we'll take whatever more time that is necessary."
That suggests to me that the internal debate about whether to leave London is somewhat heated. The Hong Kong Monetary Authority has noted what it calls HSBC's "deep historical links" with the territory, and said in April it would take a "positive attitude" to an HSBC move there. Weary of being beaten up by regulators in London, and seduced by the prospect of a surging customer base and a much more accommodative rulemaker in Hong Kong, I can only see one destination for HSBC (and Standard Chartered) -- no matter how embarrassing that might be for the U.K. government.
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