One of the outcomes of the banking crisis was a new set of far more stringent liquidity rules imposed by the Bank of England (BoE) on banks operating from the UK. To most people that was a welcome move, but to some of the banks themselves it means higher costs and less freedom, and to a large extent they really don’t like being told what to do — there was even talk of some of them upping sticks and relocating elsewhere.
HSBC Holdings (LSE: HSBA) was one, but any such plans have now been scrapped after the bank has announced it is to keep its headquarters in London, with chairman Douglas Flint telling the Today programme that “The UK is one of the most globally connected economies in the world with a fantastic regulatory system“, and that it provides “a pivot to Asia led from London“. The decision to not do anything has apparently cost HSBC something like £30m in advisory charges.
Hong Kong?
HSBC’s most likely alternative new home was always going to be Hong Kong, as the bulk of its business is in the China region. And with Chinese wobbles starting to spread, and China’s approach to regulation and economic control looking increasingly ham-fisted, I can’t help feeling that at least part of HSBC’s decision must have been influenced by a desire to minimize its exposure to Chinese regulatory control.
The share price gained a little on the news, though it’s only around 1% up at 444p as I write, and that’s not a massive vote of confidence.
Any upbeat sentiment might well have been tempered by fears that an even tougher BoE regime might be needed, after Sir John Vickers (who lead the Independent Commission on Banking) told the BBC that he thinks current plans are not tough enough and that even stronger capital positions will be required in order to prevent any future banking crash needing massive new bailouts.
Whether the BoE pays any heed to Sir John’s warning remains to be seen — as recently as December, governor Mark Carney was telling us he was happy that no further capital requirements will be needed.
But such uncertainty and disagreement must be contributing to the toll on our banking shares — HSBC is down 27% in the past 12 months, while Lloyds Banking Group has fallen 23% and Barclays has lost 39%.
Better banks
So what should you be doing, and is it now a good time to finally get back into HSBC? For me it still has to be a big “no”, as the extent of bad debts HSBC might be exposed to should China be hit by a liquidity crisis (which is looking increasingly likely) is a complete unknown.
And even though a very low P/E ratio of around 8.5 at HSBC clearly accounts for a lot of that risk, the bank’s mooted 6.4% dividend yield would not be sufficiently well covered for me, and I think both Lloyds and Barclays look like significantly safer bets right now. There’s a 2016 P/E of only 7.6 penciled in for Lloyds, and its expected 5.1% dividend would be better covered. At Barclays, the yield would be lower at 3.6%, but a P/E of only six seems irrationally low to me.