News that HSBC (LSE: HSBA) (NYSE: HSBC.US) is exploring a flotation of its UK bank could pep up interest in the shares — and if a flotation does go ahead, that should certainly improve sentiment towards the stock that has somewhat languished this year.
The Financial Times revealed that HSBC has been sounding out investors about a listing of a minority interest up to 30% of its UK retail and commercial bank, valuing it at about £20bn. It seems likely the FT story is aimed at flushing out reactions from a wider audience.
Benefits
There are some clear benefits from a listing. Under implementation of the Vickers Report proposals, UK banks will have to separate their retail and commercial operations from investment banking anyway. Separately listing the pure-play UK high-street bank would highlight this part of HSBC’s global empire, which ought to be valued at least as favourably as rival Lloyds Banking. At the moment, HSBC’s shares trade at a slightly smaller premium to NAV than Lloyds, and a significantly lower prospective P/E of 11.3 against Lloyds’ 16.1.
That’s despite HSBC yielding a generous 4.8% compared to the prospective dividend on Lloyds of 1.3% — though the latter is destined to grow as the bank returns to normality.
Regulation
According to the FT, a flotation would also address a long-standing HSBC bugbear: that UK regulation is typically harsher than elsewhere in the world. How much benefit could be garnered from that without the group relocating its headquarters from the UK remains to be seen.
HSBC’s comprehensive scale of activities and geographic presence means it bears the brunt of tighter banking regulation. Nomura recently downgraded the bank to ‘neutral’ from ‘buy’ because it sees increased regulation potentially undermining dividend progression. It wants regulatory issues to become clearer before recommending the shares again, though still sees upside in HSBC’s share price.
Yield
On the other hand, HSBC’s fat yield makes it a good time to climb on board if you have faith in its business model. Its wide geographic diversification makes it a play on the global economy. Asia Pacific drives 70% – 80% of profits, but substantial operations in the UK and US give it exposure to recovery in mature markets, whilst a strong Latin American presence is a future growth driver. The global span makes it a bank of choice for multinationals, which themselves should thrive from resurgence in world trade and the global economy.