State Intervention Sees HSBC Threaten to Leave the UK
The COVID-19 pandemic has created a global scene that is
producing some incredible reactions. One of which is the level of state-backed
intervention that is occurring in the UK and US, with the respective
Conservative and Republican governments announcing record financial packages.
However, as part of that intervention, we are starting to see elements of state
intervention in private business that is not being received well by the market.
In this post, we shall examine the Bank of England’s decision, as part of its
role as the British regulatory framework’s top supervisor, to apply pressure to
banks to cancel dividends. For HSBC, and its structure, this has proven to be a
particular issue.
It was reported recently that a number of the UK’s largest
banks had received pressure from the Prudential Regulation Authority, the
regulatory arm of the Bank of England, to halt their dividends ‘after they
were warned against paying out billions of pounds to shareholders during the
coronavirus pandemic’. Amongst the group were Lloyds, RBS, Barclays, HSBC,
Santander, and Standard Chartered (Nationwide, the building society, was also
included), who all had also agreed to cancel any plans for share buybacks. In a
somewhat unusual display of authority, the PRA sent a ‘formal request’ to the
companies, although it went further by declaring that is was ‘ready to consider
use of our supervisory powers’ if the banks did not comply with the request.
Barclays, for one, had responded by stating that whilst it was a difficult
decision to cancel dividends, they thought it ‘is right and prudent, for the
many businesses and people that we support, to take these steps’. However, the
sentiment was not shared across the group.
On the 14th April, HSBC was due to
pay a dividend of $4.2 billion. For HSBC, more than four-fifths of its
profits comes from Asia and, in Hong Kong specifically, a large proportion of
that dividend was due to be paid to retail investors who ‘rely on
dividends for a significant part of their income’. It has been suggested
that a number of the banks’ Boards were waiting for the regulator to impose
this move, in line with EU
freezes witnessed last week, to protect them from shareholder criticism,
but for HSBC the effect has been immediate. For the first time since records
began in 1946, the dividend freeze has resulted in shares in the bank falling
by nearly 10% in both London and Hong Kong trading, wiping nearly £8 billion
from its valuation. Fitch Ratings, yesterday, changed
the bank’s outlook to Negative. This has spurred the HSBC Board to consider
a number of elements. The Financial Times,
citing an ‘executive’, suggest that the HSBC Board are annoyed that the
decision sends out a message that the bank is in a weak position, when in fact
they are not. Yet, despite official communication that says the Bank fully
understands the decisions of the PRA, and that there are no discussions ‘to
review HSBC’s global headquarters and no plans to reopen the issue’, this
has not stopped speculation. Originally based in Hong Kong from when it was founded
in 1865 as the Hongkong and Shanghai Banking Corporation by Thomas Sutherland,
to 1993 when it moved to the UK to aid its takeover of Midland Bank, the bank
is now placed in a delicate position of being between two very different social
structures. The anger that is supposedly spurring such discussions regarding
re-domiciling elsewhere will inevitably be countered by the reason HSBC moved
to London in the first place – to escape the clutches of the Chinese
Government. If they were to move back to Hong Kong, that issue would re-emerge.
There is apparently anger because ‘for the
regulators at the Bank of England to put a gun to the head of the board of
directors is terrible’, but this sense of freedom to whatever it wants
would certainly be curtailed in a similar, if not more extreme fashion in Hong
Kong. It is more likely that this supposed outburst is the bank’s attempt to
exert its influence over the regulator as, in the coming post-Brexit and now
post-COVID-19 arena, the UK will need
the City of London to be as strong as possible, with losing HSBC to Hong Kong
representing, prospectively, a massive blow. Yet, it is likely that the PRA
both know and anticipated this. For its position, it cannot become a victim of
extortion every time it seeks to implement a regulatory endeavour that does
infringes, at any level, upon the freedoms of the banks.
Keywords – banks, HSBC, Hong Kong, China, UK, @finregmatters
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