HSBC Holdings plc Jumps After Spin-Off Plan Revealed

HSBC’s (LSE: HSBA) shares jumped by as much as 4% this morning as investors celebrated, following speculation that the bank is considering a spin-off of its UK consumer bank. 

It’s believed that as part of HSBC’s plan to move away from the UK, the bank will spin off its UK operations, recreating the old Midland Bank, bought by HSBC during 1992. 

According to reports, HSBC’s UK consumer bank would be worth around £20bn. What’s more, the split would help HSBC work its way around the FCA’s strict ring-fencing rules, due to come into force during 2019.

Ringfencing rules will force HSBC, and the bank’s peers, to separate high-street and investment banking arms, a move designed to protect customers from a repeat of the 2008 crisis. The ringfenced high-street side of the business will have a separate management team, computer system and reinforced balance sheet.

HSBC has estimated that the cost of ringfencing its UK high street operations could hit £2bn. So, it might be easier for the bank to split in two.

Interesting development 

Broadly speaking, if HSBC were to spin off its UK operations and move its domicile outside the UK, shareholders would be set to benefit. 

According to City analysts, it would cost HSBC around $2bn to move its headquarters and relocate outside the UK. However, it’s not clear if this figure includes the cost of spinning off the bank’s UK consumer banking arm. 

Moreover, HSBC is being unfairly targeted by the UK’s bank levy. The levy cost the bank £750m last year, despite the fact that HSBC’s UK operations reported a loss of around £50m. Almost all HSBC’s profit is generated outside the UK. 

If HSBC did decide to move away from the UK, the bank would be able to avoid the majority of the UK’s bank levy. Under changes announced within last month’s Budget, HSBC’s share of the levy could cost the bank $1.8bn a year by 2017. So, the figures clearly stack up.

Sluggish growth

Aside from the one-off costs of moving. If HSBC decides to move away from the UK and spin off its UK operations, the bank’s growth would receive a welcome shot in the arm. 

Indeed, it’s estimated that the bank levy will reduce HSBC’s profits by 7% this year, and spinning off the bank’s UK retail bank arm would improve group return on equity — a key measure of bank profitability. Over the past four years, HSBC has reported a loss of $4bn in Britain, compared to Asia/European profits of $24bn over the same period. 

Overall, a move away from the UK could be the right choice for HSBC and the bank’s shareholders.