Thursday, 2 April 2020

State Intervention Sees HSBC Threaten to Leave the UK

The COVID-19 pandemic has created a global scene that is producing some incredible reactions. One of which is the level of state-backed intervention that is occurring in the UK and US, with the respective Conservative and Republican governments announcing record financial packages. However, as part of that intervention, we are starting to see elements of state intervention in private business that is not being received well by the market. In this post, we shall examine the Bank of England’s decision, as part of its role as the British regulatory framework’s top supervisor, to apply pressure to banks to cancel dividends. For HSBC, and its structure, this has proven to be a particular issue.

It was reported recently that a number of the UK’s largest banks had received pressure from the Prudential Regulation Authority, the regulatory arm of the Bank of England, to halt their dividends ‘after they were warned against paying out billions of pounds to shareholders during the coronavirus pandemic’. Amongst the group were Lloyds, RBS, Barclays, HSBC, Santander, and Standard Chartered (Nationwide, the building society, was also included), who all had also agreed to cancel any plans for share buybacks. In a somewhat unusual display of authority, the PRA sent a ‘formal request’ to the companies, although it went further by declaring that is was ‘ready to consider use of our supervisory powers’ if the banks did not comply with the request. Barclays, for one, had responded by stating that whilst it was a difficult decision to cancel dividends, they thought it ‘is right and prudent, for the many businesses and people that we support, to take these steps’. However, the sentiment was not shared across the group.

On the 14th April, HSBC was due to pay a dividend of $4.2 billion. For HSBC, more than four-fifths of its profits comes from Asia and, in Hong Kong specifically, a large proportion of that dividend was due to be paid to retail investors who ‘rely on dividends for a significant part of their income’. It has been suggested that a number of the banks’ Boards were waiting for the regulator to impose this move, in line with EU freezes witnessed last week, to protect them from shareholder criticism, but for HSBC the effect has been immediate. For the first time since records began in 1946, the dividend freeze has resulted in shares in the bank falling by nearly 10% in both London and Hong Kong trading, wiping nearly £8 billion from its valuation. Fitch Ratings, yesterday, changed the bank’s outlook to Negative. This has spurred the HSBC Board to consider a number of elements. The Financial Times, citing an ‘executive’, suggest that the HSBC Board are annoyed that the decision sends out a message that the bank is in a weak position, when in fact they are not. Yet, despite official communication that says the Bank fully understands the decisions of the PRA, and that there are no discussions ‘to review HSBC’s global headquarters and no plans to reopen the issue’, this has not stopped speculation. Originally based in Hong Kong from when it was founded in 1865 as the Hongkong and Shanghai Banking Corporation by Thomas Sutherland, to 1993 when it moved to the UK to aid its takeover of Midland Bank, the bank is now placed in a delicate position of being between two very different social structures. The anger that is supposedly spurring such discussions regarding re-domiciling elsewhere will inevitably be countered by the reason HSBC moved to London in the first place – to escape the clutches of the Chinese Government. If they were to move back to Hong Kong, that issue would re-emerge. There is apparently anger because ‘for the regulators at the Bank of England to put a gun to the head of the board of directors is terrible’, but this sense of freedom to whatever it wants would certainly be curtailed in a similar, if not more extreme fashion in Hong Kong. It is more likely that this supposed outburst is the bank’s attempt to exert its influence over the regulator as, in the coming post-Brexit and now post-COVID-19 arena, the UK will need the City of London to be as strong as possible, with losing HSBC to Hong Kong representing, prospectively, a massive blow. Yet, it is likely that the PRA both know and anticipated this. For its position, it cannot become a victim of extortion every time it seeks to implement a regulatory endeavour that does infringes, at any level, upon the freedoms of the banks.

Keywords – banks, HSBC, Hong Kong, China, UK, @finregmatters

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