The changing face of HSBC

“The World’s Local Bank” remains the most memorable slogan in the banking industry, despite being introduced over a decade ago. Since 1993, when HSBC moved its headquarters from Hong Kong to London, they have built up one of the most valuable banking brands in the world. The bank is currently undergoing fundamental changes that will determine its direction in coming years.

The predominant reason for HSBC wanting to move its headquarters is dissatisfaction with UK banking regulation since the financial crisis

In response to local economic conditions, the bank is selling its operations in Turkey and Brazil. Growth in these regions has been lower than expected and this has been combined with high interest rates and low levels of savings. These factors all reduce the demand for HSBC’s services and loans in those countries. Its businesses in the US and Mexico are also under review and are at risk of disposal. This is a complete reversal of the bank’s historical strategy, which involved expanding into as many territories as possible. HSBC’s management are now adopting a more nuanced approach, where they pick their territories carefully and cut unprofitable operations. The bank may be finally relinquishing its reputation as a truly global bank.

The biggest change that HSBC is considering is moving its headquarters from London back to Hong Kong. The bank is optimistic about the future of the Chinese economy, with the CEO Stuart Gulliver recently announcing his prediction that China will outgrow the global economy for years to come. HSBC has hired 4000 more staff in South-East China this year, clearly indicating their interest in the region.

Although this law may be positive for the British public, it would be very disruptive for HSBC and would result in a large amount of expensive structural changes

The predominant reason for HSBC wanting to move its headquarters is dissatisfaction with UK banking regulation since the financial crisis. George Osborne recently introduced a UK bank levy, which is a tax on UK banks based on how much assets they own. This tax hits HSBC particularly hard because of the enormous amount of assets the company holds worldwide. By moving to Hong Kong HSBC would be able to avoid this tax entirely.

By the end of this year it is likely that the British government will introduce a “ring-fencing law” for UK banks. This law will completely separate the retail banking segments of UK banks from their investment banking segments. The retail banking segment is the area that deals with ordinary customer accounts, deposits and loans such as mortgages. The purpose of the law is total protect the bank accounts of the general public by ensuring that the retail section of the bank will be able to continue operating even if the rest of the bank fails. Although this law may be positive for the British public, it would be very disruptive for HSBC and would result in a large amount of expensive structural changes. The company is keenly aware that it could avoid these restructuring costs if it were to move back to Hong Kong.

Ultimately it is very difficult to predict which options the bank will take in the next few years. HSBC’s management are under pressure to make choices which will determine the company’s success over the next decade or more, for better or for worse.