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(Repeats story from Sunday)
By Steve Slater
LONDON, May 3 (Reuters) - In 1990, an assessment calledProject Rainbow paved the way for HSBC to move fromHong Kong to Britain. As Europe's biggest bank now considersmoving back, the same exercise offers clues to its finaldecision, say industry sources and analysts.
Project Rainbow assessed HSBC's future base by consideringwhether it was operationally effective, tax efficient,politically acceptable, consistent with bank regulatoryrequirements, in the best interests of shareholders andcompatible with any future merger of HSBC and the Midland Group.
After HSBC said its formal review of whether to changeheadquarters again could take six months of complex discussions, industry observers are looking to previousdecision-making criteria to try to forecast its final decision.
OPERATIONALLY EFFECTIVE
How easily Chief Executive Stuart Gulliver can keep his newstructure intact is a major consideration, particularly afterhis work in the last four years to cut costs, improveprofitability and simplify operations following a string ofscandals partly blamed on a lack of central control.
Gulliver has also re-established Asia as the bank'sheartland, reversing two decades of expansion in Europe and theAmericas so that 63 percent of profits in the last two yearscame from Asia.
Significantly, HSBC has said it needs to be positioned "inthe best way to support the markets and customer bases criticalto our future success."
TAX EFFICIENT
A jump in Britain's bank levy prompted HSBC to considermoving.
It will pay some $1.5 billion under the levy this year - about 7 percent of expected pretax profits - up from $1.1billion in 2014. That could rise to more than $2 billion if theopposition Labour Party wins power in Britain's May 7 generalelection because Labour has said it will increase the levy by800 million pounds ($1.21 billion) a year.
UK banks pay the levy - which has been raised eight timessince being introduced in 2010 to ensure banks made a "faircontribution" - on all their balance sheet. Overseas banks payit on their UK assets. If it moved, HSBC would be taxed on about42 percent of its assets, potentially saving $900 million ormore a year.
HSBC paid $7.9 billion in total taxes last year, including$2.4 billion in Britain and $1.3 billion in Hong Kong.
POLITICALLY ACCEPTABLE
HSBC initially moved to London following its takeover ofMidland Bank, at the insistence of the Bank of England. Butinsiders at the bank said the decision had more to do withsoothing investors' worries about the future of Hong Kong whenit was handed back to China in 1997.
Now China's relationship with Hong Kong is gearing up to beanother key issue for the bank.
Hong Kong's economy has flourished over the last 18 yearsunder a formula dubbed 'One country, two systems' whereby theterritory kept a separate legal system and greater freedoms.That pledge expires in 2047 and analysts say there is concernBeijing could start to exert greater control over the territory.Tension over the mainland's existing influence in Hong Kongprompted demonstrations last year.
HSBC's $2.6 trillion balance sheet, at eight times the sizeof Hong Kong's economy, means it would likely need Beijing'sbacking to move.
But closer ties with China could raise questions about HSBCwith U.S. regulators, given the bank's importance as a clearinghouse for U.S. dollar-denominated trade.
Staying in Britain may not ensure political stability,however. Prime Minister David Cameron has promised to hold areferendum about Britain's membership of the European Unionshould his Conservative party win elections this month. HSBC hassaid the threat of Britain leaving the European Union is a majoreconomic uncertainty.
CONSISTENT WITH BANK REGULATIONS
Regulators in Britain and Hong Kong 'gold-plate' globalrules so their banks must hold extra capital.
As a global bank deemed to be systemically important, HSBChas to take greater precautions than smaller rivals to ensureits security. It has said it expects to operate with corecapital of 12-13 percent.
Hong Kong will not be a 'lighter touch' regulator and HSBCwould probably have to maintain a similar level of capital, orslightly more, if it moved there, analysts said.
Oversight would be shared by regulators in Britain, HongKong and the United States wherever the bank ended up, theysaid.
BEST INTERESTS OF SHAREHOLDERS
If it moved out of Britain, HSBC would potentially save $900million or more in tax a year. That would add more than $9billion to its value, based on the bank being valued byinvestors at about 10 times its earnings.
In Hong Kong, where HSBC is known as "The Bank", many of itsthousands of small shareholders resent the UK tax as comingdirectly off their cherished dividends. The bank refuses to saywhere its shareholders are located, including 1,100 biginstitutions who between them own 94 percent of shares.
Investors have told Reuters in recent weeks that HSBC andits rival Standard Chartered needed to assess theirdomicile, although most held back from saying they had to move.
"The politics in the UK is getting messier at the same timewhen bank CEOs are being pressurised by investors to improvereturns. In this environment...we see HSBC and StandardChartered taking flight," said Chirantan Barua, analyst atBernstein.
FUTURE MIDLAND GROUP?
Under new rules, Britain's big banks must separate retailbanking from other areas by 2019.
That could leave HSBC without any directors on the board ofits separate UK bank, which would also make decisionsindependently of the parent group - potentially leaving HSBCwith little power over a business it fully owns.
The new rules are unlikely to be significant as astand-alone factor to prompt HSBC to leave Britain. But if itdoes it could consider spinning off its UK retail business andseparately listing it - possibly branded Midland Bank - under arestructuring around the same time as it moves, just as it didin the early 1990s.
($1 = 0.6605 pounds) (Additional reporting by Lawrence White in Hong Kong; Editingby Sophie Walker)
