Why I’d Buy HSBC Holdings plc And Hold Standard Chartered PLC

HSBC (LSE: HSBA) and Standard Chartered (LSE: STAN) may move their headquarters away from the UK, but there’s no place where they can hide. In this context, I’d still buy the former over the latter, although there are safer options in the marketplace. 

Background

HSBC has launched an immediate review into whether it should move its headquarters, it emerged on Friday, while Standard Chartered is one obvious candidate that could relocated to Hong Kong. 

HSBC’s Douglas Flint told the CNBC that relocating the bank’s headquarters back to Hong Kong would be potentially interesting. 

Such a strategy could do more harm than good to shareholders over the long term, however, but I still believe that HSBC is a safer option than Standard Chartered, and its shares could easily hit 700p by the end of the year.

At a time when the investment banking model is being reviewed, London remains the capital of financial markets worldwide: it’s worth considering that investment banks have faced much tougher regulations when helping clients float in Hong Kong for years now, while record-breaking fines have come from the US. 

Reaction

As the regulatory landscape gets tougher and banks continue to struggle to make their cost of capital, HSBC is reconsidering its domicile, news of which pushed up the stock by 3% on Friday. 

We live in a world where allegations of fraud against a bank becomes reality most often than not, and that’s the biggest risk when it comes to investing in banks right now.

So, why are investors betting on HSBC, which also surged 4% in early trade on Monday in the wake of spin-off rumours? 

Quite simply, its assets portfolio is very attractive and the bank has options with regard to funding and capital allocation.

Spoiled Kids

Bankers aren’t too different from spoiled kids, and that showed in HSBC’s announcement on Friday. 

HSBC is also is weighing plans to spin off its British retail bank business, which could be worth between £20bn and £25bn, depending on trading multiples assigned to the unit. 

The stock has gained almost 7% in less than two trading sessions, and may contine to rally either based on expectations or if changes are swiftly implemented.

What HSBC and Standard Chartered executives should keep in mind, though, is that transparency is needed — and they should be based where transparency is granted. 

First, Britain’s legal structure offers reassurance to investors worldwide, while the importance of London’s time zone must not be underestimated.

Second, moving headquarters would not be a cheap option, as HSBC would have to reapply for hundreds of banking licences. 

But there is more than economics at stake here — reputation is on the line, too. 

Just 10 days ahead of the general elections, HSBC may be trying to put pressure on the UK government, but it’s not the UK government that has changed its approach to regulations since the collapse of Lehman Brothers: the banking compliance systems have changed globally, and regulators have simply decided to tackle some of the most serious issues in the industry such as money laundering, tax evasion and similar crimes that have been favoured by banks’ behaviour for years.