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* HSBC has up to $10 billion 'trapped' in U.S. - analysts
* Repatriation needs goodwill of U.S. regulators
* Banks' foreign businesses pushed to hold more capital
By Lawrence White
LONDON, Sept 23 (Reuters) - Britain's HSBC isseeking to release billions of dollars of capital tied up in theUnited States without upsetting the country's politicians andregulators, senior sources at the bank said.
HSBC, which has been in the sights of U.S. regulators overbreaching anti-money laundering rules, has more than $20 billionof capital in the United States earning a slim 1 percent return,of which up to half could be returned to the holding company viaasset sales, analysts and investors say.
The bank's investors are currently missing out on higherprofits and more secure dividends as a result of this hefty U.S.balance sheet. The bank earns a return on equity of just 1.4percent on this, compared with 5 percent for HSBC globally and13 percent for major U.S. commercial bank rivals, according toDeutsche Bank research.
"The issue is a valid one, as it appears that the capital inthe USA is earning low returns," said Richard Marwood, SeniorFund Manager at Royal London Asset Management, which owns HSBCshares. "As shareholders we are concerned about where companiesdeploy capital and what the long term returns on that capitalare."
HSBC holds so much capital in the United States, in part,because after the 2008 financial crash and the collapse ofLehman Brothers, U.S. regulators and others around the worldmade foreign banks operating on their soil boost capital tobolster their strength.
This trend has forced banks, including Barclays,Deutsche Bank and HSBC, to hold billions of dollarsmore in their U.S. businesses, putting pressure onprofitability.
It also partly relates to a drawn-out sale process forHousehold, the consumer lending business HSBC bought in 2003 inan ill-fated $16 billion deal.
The bank's ability to take capital out of the United Statesis subject to it submitting plans to do so to the FederalReserve.
HSBC passed an annual U.S. stress test in July, paving theway for the bank to remit a maximum of $2.5 billion of excesscash in 2017 to its holding company in Britain with the fullapproval of the Fed.
"Any return of capital would always be subject to receivinga non-objection from the Federal Reserve," HSBC chief financialofficer Iain Mackay told Reuters in a telephone interview.
POLITICAL CLIMATE
The U.S. authorities have a track record for being tough onEuropean banks and have imposed big financial penalties on somefor past misdeeds.
HSBC struck a deferred prosecution agreement (DPA) in 2012with the U.S. Department of Justice under which it would not beheavily punished for failures in anti-money laundering efforts,subject to the bank committing to improve controls.
"The DPA, which could drag out, and outstandinginvestigations probably mean the U.S. authorities would be morecomfortable that capital stayed within the U.S.," another majorHSBC investor said.
The Federal Reserve Board and the Department of Justicedeclined to comment.
Some of the HSBC sources, who declined to be identified,said taking more capital home would also prove a challenge whenthe political climate in the United States is hostile to banks,and there is the added uncertainty of the Nov. 8 presidentialelection.
HSBC has $33 billion dollars of capital allocated to itsNorth American businesses, according to a Deutsche Bank analysison Aug. 30, of which just $6 billion, mainly the Canadabusiness, is making a healthy return of 9 percent.
"...the scope and scale of capital HSBC has allocated toNorth America is sub-optimal for shareholders and needs to berevisited," Deutsche analysts wrote.
Analysts and investors have different views on how muchcapital the bank could free up while still keeping a viable U.S.business, but they put the range at $5-10 billion dollars.
HSBC pays dividends to investors from its holding companyHSBC Holdings Plc, whose ability to pay out has come underpressure partly as a result of weaker revenues and alsoregulatory demands to retain capital.
"While we would like to see returns increase, or failingthat redeployment of capital into markets outside the U.S., itis for the company to best decide how to achieve this and how tomanage its relationship with local regulators," Marwood of RLAMsaid. (Reporting By Lawrence White, additional reporting by SineadCruise and Suzanne Barlyn in New York; Editing by John O'Donnelland Jane Merriman)
