HSBC sets out choice between immeasurable differences
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Version 0 of 1. Out of ten, how many marks would you award the UK and Hong Kong for long-term stability? The Brits win that one, surely: possible exit from the EU looks more comfortable than having the Chinese Communist party breathing down your neck. How about high Transparency International score? Another easy victory, you’d think. And tax system? Well, given HSBC’s grumbles about the bank levy, Britain wouldn’t play its joker in that round. Welcome to HSBC’s Structured Review of Location of Holding Company to maximise long-term shareholder value. It comprises eleven criteria HSBC will use to decide whether to quit the UK. The process seems to be a little like choosing a new car. Model A goes from 0-60mph faster and the seats are terrific; but model B has more room in the boot and lots of those useful cup holders. Is this really, though, a suitable way to decide where to domicile a big bank? The problem with Hong Kong remains what it was in 1992, when HSBC moved to the UK with the purchase of Midland Bank: the lack of democracy under Chinese rule. Hong Kong’s post-handover experience may have softened HSBC’s worries, but can anyone be confident what the position will be 10, 20 or 30 years from now? By moving to Hong Kong, HSBC might save $1bn a year on the bank levy. There are established models to calculate that capital value: call it $12bn in today’s money, say analysts. But how on earth do you put a similar financial value/deduction on shifting a large international bank to a territory under the control of a non-democratic regime? It’s impossible. That’s the problem with HSBC’s approach. The bank may call its review “structured”, but it comes down to management’s appetite for political risk. That issue towers above all others. In practice, one suspects, the process is a dance designed to persuade George Osborne to go soft on the bank levy, perhaps by charging it solely on UK assets once the banks have ringfenced their UK operations by 2019. Perhaps the chancellor will give ground on that score in time: it would not be irrational to recognise that ringfencing, when complete, reduces the risks of future banking crises to UK taxpayers. But Osborne would be silly to make public commitments tonight. The Mansion House speech is not an occasion to play Domicile Top Trumps. Colossal effort needed from Gulliver to keep pace with events As for HSBC’s latest strategy itself, shareholders were underwhelmed. In short, the bank will have to make a colossal effort, in the form of shedding 25,000 jobs plus operations in Brazil and Turkey, to achieve merely acceptable performance ratios. The prize paraded by chief executive Stuart Gulliver was a return on equity of greater than 10% by 2017. That outcome would be better than the 7.3% achieved by HSBC last year, but the best medium-term returns in the sector are destined to come from domestic players, like Wells Fargo in the US and Lloyds Banking Group in the UK. The question is whether HSBC, even after its “pivot” towards Asia, will still be too big and too sprawling to be managed efficiently. Gulliver offered a robust defence of the model, arguing that $22bn of HSBC’s revenues can be attributed to its global network. It’s only “three or four or five” big countries that have been spoiling the mix. If laggards can be fixed or sold, the broth will taste better. As a plan, it’s credible. But it was also credible when version A was unveiled in 2011. In the meantime, Brazil and Turkey have declined in value and the competition in Asia is getting stronger. HSBC is still struggling to keep up with events. Hardly a peep from shareholders on Sorrell’s £43m remuneration By WPP’s standards, it was a decent result: “only” 22% of voting shareholders refused to back a pay report that contained chief executive Sir Martin Sorrell’s £43m pay package. It was the weakest rebellion for years. The steam went out of this debate in 2013 when WPP agreed to dismantle the Leadership Equity Acquisition Plan (Leap), its supercharged co-investment scheme. The twist, however, was that Leap was allowed to expire naturally. The last of the five-year cycles runs until 2016, allowing Sorrell and co a few handsome last hurrahs. In its way, the shuffle by the pay committee was brilliant: shareholders could congratulate themselves on imposing “restraint”, but Sorrell’s pay was allowed to rise for a while. The great man can even collect £274,000 for “spousal travel costs” these days and hardly anybody cries foul. |