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Emigrant blues

5 May 2015 By Peter Thal Larsen

HSBC’s revival is overshadowed by its existential angst. Higher investment banking revenue and fewer bad loans helped boost first-quarter results at the global bank, offering a welcome respite from restive shareholders and political uproar over Swiss tax. However, HSBC’s longer-term fortunes depend on how it answers three big questions.

The immediate conundrum is the $194 billion lender’s shape and size. Despite four years of intense surgery, costs are rising while returns are still too low. Chief Executive Stuart Gulliver will detail the next steps on June 9. Further pruning seems inevitable: underperforming units in Mexico, Brazil, Turkey and the United States are under review, while some wholesale and commercial banking operations could also go.

The medium-term riddle is location. The bank is reviewing whether to move its headquarters out of the United Kingdom. HSBC’s main gripe is the UK bank levy, which could cost it around $1.5 billion this year, and would rise to almost $2 billion if the Labour party wins Britain’s general election and keeps its campaign promise to raise the tax. Every increase threatens HSBC’s promise to investors to keep raising its dividend.

Relocating to Hong Kong or Shanghai would bring fresh challenges, but allow HSBC to stop paying the levy on its non-British business. The bank would also be freed from European Union restrictions on bonuses that do not apply to Asian and American rivals. HSBC’s board is likely to decide later in the year – though any move would take years.

HSBC must also decide what to do with its UK business. British lenders must place their retail and commercial units in a ring-fenced subsidiary with a separate board by 2019. HSBC is unsure whether it will then be able to exert control over its wholly owned UK subsidiary. If not, it might decide to sell out.

HSBC shares have risen by almost a tenth in the past month amid hopes that a shake-up would bring financial benefits. They now trade roughly in line with expected year-end book value. A sustained revival would justify a higher rating. Yet the nature of existential questions is that they tend not to have quick answers.



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