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LONDON (Alliance News) - HSBC Holdings PLC is to decide whether to move its headquarters from the UK by the end of 2015, management told reporters on Tuesday, as the group reported higher first-quarter pretax profit but said that its return on equity, a key measure of profitability watched by shareholders, had fallen.
HSBC shares were down 1.4% at 637.30 pence on Tuesday, after having initially spiked higher on the announcement made during trading hours in London.
The company, the biggest London-listed bank by market capitalisation, upped the stakes when it revealed at last month's annual meeting of shareholders the launch of a review into where the holding company should be domiciled, as the UK government continues to impose a levy on banks' global balance sheets and European rules impose restrictions on bonuses. The review is the latest component of a restructuring that has seen Gulliver sell of dozens of businesses to sharpen the group's focus, with the aim of making it simpler and more cost efficient.
Chief Executive Stuart Gulliver told reporters that a decision on its headquarters will be made within months. If the group decides to move away from London, it would require the consent of the board and shareholders and approval from various regulators.
"Until we've done that work it's impossible to quantify what the savings might be. I would expect to be in a position to go back to the board by the year-end," Gulliver said on a conference call.
The CEO said to expect further details about the methodology and the selection process that will be used to determine the best place for the holding company's headquarters at an investor day on June 9. He added that the Hong Kong Monetary Authority is qualified to regulate HSBC.
"They're regulating about 80% of the profit of the group already and have been for many, many years, so they're quite capable of regulating the group," Gulliver said.
HSBC, which makes most of its money in Asia but shifted its headquarters to London in 1992 after 127 years in Hong Kong, has been hit hard by the introduction of the bank levy in the UK and subsequent increases in the rate at which it is imposed. Ahead of the UK's General Election later this week, politicians have suggested that the bank levy is here to stay and could even be increased again. Meanwhile, European authorities have capped bonuses that can be paid by banks, putting pressure on HSBC's ability to compete for talent in Asia.
Gulliver said the review of the group's global headquarters was not meant to be a threat to the UK, adding that the timing of the announcement was deliberately set ahead of the General Election so as to make it as "apolitical as possible".
"The levy is not a tax. It's a levy. It's a pre-dividend distribution. So we have shareholders who are saying the dividend won't be progressive because the levy is jumping... faster than you can grow your dividend," Gulliver said.
"We are under significant pressure from shareholders who don't understand the extent of which their dividend and the growth of the company is being set back by what they perceive to be in their view as the wrong location," Gulliver added.
"We make 86% of our profit outside of the European Economic Area. It's quite hard to hire people in Guangszhou when their compensation is constrained by rules set in Europe, particularly when the Chinese, American, Australian and a lot of our competitor banks are not," Gulliver said.
An exit from the UK would not affect very many of the 48,000 HSBC employees in the UK, according to Gulliver, who said such a move would affect probably 250 jobs at the most.
The CEO also pointed to a lack of certainty on new rules set to come into force in the UK in 2019 that require banks to ring-fence retail banking operations from investment banking activities. He said the risks to HSBC relate more to governance of the ring-fenced entity than to ownership.
"It's not necessarily around the percentage of shareholding. It's around governance and your ability to be involved in management and direction of the company. A key part of the structure of the holding co with a bunch of banks is the dividend is paid from the holding company, so getting a dividend out from the operating banks is critical," Gulliver said.
The CEO set out a hypothetical scenario in which the ring-fence becomes electrified in the event that the holding company tries to exert influence on the management of a ring-fenced entity, though he emphasised that the final ring-fencing rules are yet to be known at this time.
"What would be uncomfortable would be to have a substantial equity exposure to a company we can't manage, a company where we can't control its levels of capital or the dividend it pays up," Gulliver said.
While there have been press reports that HSBC could opt to spin off its retail banking operations in the UK to deal with ring-fencing rules, Gulliver said it's simply too early to even consider such a move.
HSBC is still reviewing operations in Brazil, Mexico, Turkey and the US. Gulliver told reporters to expect a "restructuring story" in the US, which is an important market for the group because it boosts business booked in other parts of the world with US corporations, provides access to US dollar clearing, and provides deposit funding that means parts of the group needn't turn to more expensive wholesale funding.
"We haven't said we're disposing of Mexico, Brazil, Turkey and the USA. We're saying we're saying we're reviewing them so we can get return on equity above cost of equity and what we implied was if we can't then there are probably better owners of those businesses than us," Gulliver said.
The group made a USD7.06 billion pretax profit in the quarter ended March 31, compared with USD6.79 billion in the corresponding quarter of the prior year, driven up by its investment banking division and its Asian operations, but pressure on returns remain as the group continues its restructuring. Its first-quarter dividend remained at USD0.10 as the group increased its common equity tier one ratio, a key measure of financial strength to 11.2% from 11.1% inside the first three months of the year.
However, first-quarter return on average shareholders' equity fell to 11.5% from 11.7%, demonstrating the pressure on returns at the group, which is fresh from reporting its lowest such annual return on equity since the global financial crisis. Return on equity fell to 7.3% in 2014, compared with 9.2% in 2013, the lowest seen since the low-single digits reported in 2008 and 2009.
Net interest income, which is the difference between the interest received on assets and that paid out on liabilities, fell by 6% to USD8.27 billion, while net fee income was down by 9% to USD3.68 billion. Those declines were partly offset as net trading income increased by 14% to USD2.58 billion.
Results were bolstered by net income from financial instruments designated at fair value, which increased to USD1.60 billion from USD508 million, while gains less losses from financial investments were up to USD647 million from USD184 million. Net earned insurance premiums fell to USD2.98 billion from USD3.14 billion.
Operating profit increased to USD6.48 billion from USD6.23 billion, as impairment charges for bad loans and credit risk fell to USD570 million from USD798 million, and net insurance claims and benefits paid and movement in liabilities to policyholders increased to USD4.23 billion from USD3.34 billion.
Gulliver said the group recovered well after a tough final quarter of 2014, citing the "usual strong start" for its investment bank, which was helped by its markets business. The CEO said the commercial banking business performed particularly well in the UK and Hong Kong, while the principal retail banking and wealth management arm generated higher revenue. He said the fall in loan impairment charges was particularly visible in Europe and North America.
HSBC did not increase its provision for authorities' investigations into manipulation of foreign exchange markets, though Finance Director Iain Mackay did not comment on how the situation might develop.
Settlements and provisions in connection with foreign exchange investigations amounted to USD1.19 billion in 2014, including USD809 million in the final quarter.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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