As rumors abound about HSBC and Barclays moving their bases away from the UK, IR magazine wonders where the pressure for such moves really comes from
The mooted move of HSBC’s headquarters from London to Hong Kong has been one of the most enduring tales of the post-financial crisis era, despite none of it really being news. And now Barclays has joined the party, with UBS cheering it on from the sidelines.
Indeed, the idea of a Barclays move first claimed popular attention when UBS issued a research note in which it argued that Barclays was too big for Britain.
Almost immediately, the mayor of New York, Michael Bloomberg, threw open his arms to welcome Barclays. Bloomberg news quoted Mayor Bloomberg as saying: ‘I had not known it had gone from considering to confirming that it’s moving here. I hope it moves here. That would be great for us.’
But had Barclays really already made this decision? Indeed, had anyone even asked Barclays what its plans were? Well, yes, at least by the day after the UBS note was published, when CEO Bob Diamond responded that London was where the bank wanted to be. ‘Of course, it’s our obligation on behalf of our shareholders to look at the alternatives, but this is home and where we want to stay,’ he maintained.
The UBS note, by banking analysts John-Paul Crutchley and Alastair Ryan, was based on the contention that Barclays had become too big to fail in the UK. According to the analysts’ calculations, the bank’s gross balance sheet, including full derivative positions, is 100 percent of UK GDP.
They argue that Barclays’ shareholders are really faced with two options: either they ‘effectively force a change of strategy upon management that forces Barclays to reduce its balance sheet and free up capital for distribution to shareholders; or Barclays’ management is pressured into relocating the business…’
Crutchley and Ryan go on to suggest that such relocation would most likely be in conjunction with ‘some corporate activity’.
Game playing
Intriguing thoughts, but do they bear any relationship to reality? Of course, the whole cat-and-mouse game about shifting locations is one that corporates play most assiduously with governments and regulators, rather than shareholders. But putative shareholder pressure tends to serve well as a justification for possible moves.
Barclays, however, has no time for – or interest in – such shenanigans. Of course, the analysts and shareholders who follow Barclays have been asking questions about the likelihood of ‘redomiciling’ for some time; it’s been a logical next question for investors ever since there has been regulatory uncertainty. But they’ve not been given any encouragement.
Indeed, Barclays’ policy is not to discuss the issue publicly. Others may opt to use the airwaves or the press to voice concerns about impending legislative changes with the aim of reducing the likelihood of greater regulatory pressure. But that’s not been the Barclays approach; some suggest the bank regards such tactics as ‘a rather blunt instrument’.
As for HSBC – whose liabilities, UBS should note, are about 10 times Hong Kong’s GDP – it says it privately reviews whether London should remain its legal headquarters every three years; the difference this year is that the timing is dynamite.
Mindful that it does not want to look like a greedy bank switching base simply to avoid tax, while at the same time knowing that a threatened move might strengthen its own hand in lobbying negotiations, HSBC has attempted to perform a careful balancing act: it sometimes dampens speculation while simultaneously encouraging the stories by never quite ruling out a move.
The latest of these efforts includes an intriguing piece of language that appears to achieve both these aims. HSBC says its shareholders are asking it to justify ‘staying in London’ – a neat sidestep following a Sunday Telegraph report that the bank had told its biggest shareholders it is preparing to quit the city.
In a joint statement responding to that story, chairman Douglas Flint and chief executive Stuart Gulliver said the bank had been ‘very clear’ that it would prefer to stay in London and that any talk of a move ‘is entirely speculative and presumptuous.’
But they added: ‘We are, however, in light of possible regulatory changes and additional costs such as the bank levy, being increasingly asked by shareholders and investors about the likely additional costs of being headquartered in the UK. We are very clear that the City of London’s competitive position deserves protection, and HSBC will play a full part in this: we are encouraged by the UK government’s recent commitments to do the same.’
Shareholder-driven
That’s one way of looking at it, but the implication here is that it is the shareholders – rather than the bank – pushing this process. That could be construed as a clever piece of spin.
As one major HSBC shareholder, who did not want to be named, says: ‘We ask the board to justify everything. You could say [that shareholders are asking HSBC to justify moving to Hong Kong]. What we are looking at is not only a potential tax advantage but also how a move will affect the rights of shareholders. The UK has to protect minority shareholder rights and I think that’s something that needs to be considered if you’re changing country.
‘Obviously you’ve got to analyze where the structure is: HSBC has a bigger business in Hong Kong. It has to review and justify the full strategy for the company, the people on the board and how the whole structure of the company is put together. It is then down to the chairman to report to shareholders.’
Equally, a single investing institution may hold more than one view on this subject. In particular, a short-term fund manager may take a different line from a colleague within the same company who has more long-term horizons.
‘We hold regular meetings with all the companies we are invested in,’ explains one shareholder. ‘There are two groups of our people who participate in these meetings – corporate governance people and fund managers. One looks at the company to see whether there is an investment opportunity, the other looks at it from the viewpoint of someone who already owns the stock and is interested in the ongoing management of the company.’
But there’s no denying that some investors are concerned about location. In a recent research note on HSBC, London stockbrokers Killik & Co note in its list of main risk factors that ‘regulatory changes add costs, like the UK banking levy.’ All this, of course, leads back to the banks’ negotiating position around the future regulation of UK banking.
Full public disclosure?
In a note following the joint statement by Flint and Gulliver, Bruce Packard, an analyst at broker Seymour Pierce, writes the following: ‘A lot is going on behind the scenes here. It looks as if the regulators are doing their lobbying in public, yet we think it is highly likely the banks are lobbying over the heads of the regulators directly to the politicians.’
Packard also notes that the history of special interest lobbying is checkered, citing cases such as accountants resisting the separation of consulting and auditing before the implosion of Arthur Andersen, or airlines fighting new safety and security measures before the attacks of September 11, 2001.
‘Although the structural remedies the UK’s Independent Commission on Banking might recommend would raise costs and reduce profitability, they could also change the structure of the industry to the benefit of the owners of equity capital rather than the bonus-collecting managers,’ he points out.
So will Barclays and HSBC stay in London or will they go? And will final decisions be the result of directors’ and boards’ concerns for shareholders – or also for the amounts they can get away with paying themselves and their staff? As in the song by the Clash, shareholders may be insisting, ‘You gotta let me know’. Right now, however, it seems no one really knows for sure – not even the banks themselves.
