Morning Coffee: The ultimate guide to why HSBC should move back to Hong Kong

The Hong Kong and Shanghai Banking Corporation (HSBC) has for the past 22 years been headquartered in neither of the cities contained with its name. Now it is seriously considering whether to move from London back to Hong Kong – Chairman Douglas Flint told the bank’s annual general meeting on Friday that the board has “asked management to commence work to look at where the best place is for HSBC to be headquartered in this new environment”.

A potential relocation would cost billions and comes with its own set of complications, but Hong Kong is the most likely new destination for the bank’s HQ and it is looking increasingly difficult for HSBC to resist returning to the city where it was founded 150 years ago. Here are some of the key reasons why HSBC may choose to relocate.

1) HSBC would pay less tax in Hong Kong

Shareholders have urged HSBC to consider moving its headquarters to Asia, largely because it would pay less tax. The firm has already shouldered the heaviest tax burden since the UK’s Bank Levy was introduced in 2010. It would also face the largest incremental burden if the British Labour Party, which has promised to increase the levy, leads the next UK Government after the country’s General Elections in May. Although a move to Hong Kong wouldn’t mean escaping the levy entirely, Investec estimates HSBC could cut its bill, which stood at £750m last year, by two-thirds.

2) Moving HSBC executives to Hong Kong should be straight forward

Shifting headquarters would involve trying to uproot some of HSBC’s London-based senior bankers and executives – but many of them are likely to be tempted to move to a market where the top rate of income tax is only 17% (compared with 45% in the UK). Moreover, the Labour Party wants to roll out a tax of 50% on all bonuses above £25k if it wins the elections. No wonder HSBC CEO Stuart Gulliver is already tax domiciled in Hong Kong.

3) HSBC’s workforce is already huge in Hong Kong

While HSBC would need to add to its Hong Kong headcount if it relocated, it wouldn’t be building from a low base – it employs some 30,000 staff there and typically has more than 300 local vacancies advertised at any one time. And as we reported earlier this month, the bank enjoys a strong reputation among Hong Kong job seekers, making it easier to expand post-relocation. HSBC is one of five firms deemed systemically important to the city’s banking system and Hong Kong is HSBC’s most profitable big market – together with subsidiary Hang Seng it’s responsibility for roughly a third of lending and deposits in the city.

4) The Hong Kong regulator backs HSBC

In an era in which regulatory compliance is top of banks’ agendas, HSBC will be heartened that the Hong Kong Monetary Authority has spoken out so soon in support of a relocation. The move would be a “positive development”, the HKMA said in a statement on Friday. “HSBC is the largest bank in Hong Kong and has deep historical links with Hong Kong.” In the UK, by contrast, HSBC faces a growing regulatory burden – in particular the requirement to ringfence its retail business from its investment banking operations.

5) The market backs HSBC (so far)

News of HSBC’s HQ review was greeted on Friday by…a spike in HSBC’s shares.

6) HSBC would have more political support in Hong Kong

Despite recent pro-democracy protests, Hong Kong has a largely stable government which openly supports the banking industry. In the UK, however, the sector has been a political football since the global financial crisis and banker bashing has continued throughout the current election campaign.

7) Hong Kong would give HSBC more regional reach

Hong Kong is used by many banks as a gateway to China and as a regional hub for the whole of Asia – but actually being headquartered in the city would give HSBC even greater access to China, where it is already the largest foreign bank. By contrast, one of the reasons mooted by Chairman Douglas Flint for HSBC moving from the UK is the potential for the country to withdraw from the EU if the governing Conservative Party is re-elected next month.

8) People in Hong Kong actually like HSBC

While in the UK HSBC is at best regarded as ‘just another bank’, in Hong Kong it is synonymous with the city, issuing banknotes and housing employees in an iconic harbour-front building. As the British media slammed the bank for its Swiss banking scandal earlier this year, Hongkongers queued for hours outside HSBC branches for special HK$150k banknotes celebrating the firm’s 150^th birthday.

Meanwhile:

J.P. Morgan names Karen Li head of China equity research. (Reuters)

ICBC top Wells Fargo as world’s most valuable bank. (Bloomberg)

OCBC and UOB are opening branches in Myanmar. (Today)

ANZ reported to revive talks to sell stake in Indonesia’s Bank Panin. (Bloomberg)

Great Eastern Q1 net profit down 5%. (Straits Times)

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