HSBC needs concrete Brexit plan

Business | Ivan Tong 12 Apr 2019

The latest news about the ongoing Brexit deadlock is that the European Union has granted the Britain a six-month extension to Brexit until October 31 while the UK has agreed to participate in European Parliament elections next month.

Talks between British Prime Minister Theresa May and the Labour Party, meanwhile, reportedly have made little headway.

Brexit has become an amusing TV soap opera for us Hongkongers --- unless you have properties or investments in the UK or your children are studying in there!

In addition, investors who own HSBC (0005) shares will be closely watching the drama unfold.

The London-based bank held an informal shareholders' meeting at the beginning this month in Hong Kong.

Many participants revealed their concerns about Brexit's impact on HSBC while some suggested the management adopt a more aggressive dividend policy and relaunch a share buyback plan.

Others asked whether HSBC would shift its headquarters back to Hong Kong.

Commenting on HSBC's strategy on Brexit, chief executive John Flint said the bank could move more than 1,000 staff to Paris, the capital of France, once the UK exits the EU.

While this is feasible, the big worry is that the UK's economy and financial activities will suffer a huge shock after Brexit, so relocating staff will hardly scratch the surface of the problem.

At the meeting, Flint also stressed that the bank was not considering relocating its headquarters back to Hong Kong.

However, under the current circumstances, there is merit in keeping this strategy as a contingency plan, even if HSBC has temporarily ruled out the Brexit risk and uncertainty over the issue remains high.

The main benefit will be that HSBC will have to pay less tax.

The UK has seen a downward trend in tax on profits in recent years but it still stands at around 20 percent, compared to 16.5 percent in Hong Kong.

The revenues the Hongkong and Shanghai Banking Corporation and Hang Seng Bank (0011) have outperformed their parent for a long time, in terms of return on investment, the tax advantages is a key driver.

HSBC's dividend payout ratio is relatively high at 6 percent and that is still attractive for investors who want a steady dividend income from their investments.

Further increasing the dividend payout ratio, of course, is a good thing for shareholders but HSBC's prospects are tied to the global economy.

HSBC's share price rose from HK$45 in mid-2016 to HK$85 at the beginning of 2018, driven by the expansion of interest margins as the United State Federal Reserve raised rates, as well as by share repurchases.

But now, the share buyback plan has come to an end, and with the Fed putting interest rate hikes on hold amid growing market expectations of rate cuts, a narrowing of interest margins will adversely affect HSBC.

This is why the bank's share has been stagnant since the end of last year, even through the benchmark Hang Seng Index broke past the key 30,000 level this week.

The EU's latest deadline for Brexit is October 31, Halloween night, and it has told the UK to "stop wasting time" and prepare for Brexit as early as possible.

HSBC's shareholders, especially those in Hong Kong, will certainly be hoping that the bank has a concrete plan in place to deal with Brexit and limit the negative impact it will have on its business.

Investors meanwhile will be hoping that HSBC will keep the option of moving its headquarters back to Hong Kong on the table, and seek more opportunities in Hong Kong and the Greater Bay Area.

Ivan Tong s Editor in Chief of The Standard

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