HSBC could still leave UK despite bank levy tax changes

hsbc tower

The bank will make a decision on its domicile by the end of the year, chairman Douglas Flint reaffirmed, after announcing the review in April.

The Telegraph reports that one factor pushing the bank to consider moving is the bank levy, a British tax introduced in 2010 that targets UK-based banks’ global balance sheets. As a highly globalised bank, this hit HSBC harder than any of its rivals.

In last month’s emergency budget Chancellor George Osborne said he would cut back the levy and introduce an 8 per cent corporation tax surcharge on UK profits instead – a move aimed at encouraging HSBC to stay.

“The UK’s made some changes to the tax framework which we think are positive to the structure of taxing banks in the UK,” said Mr Flint. But he warned that while the change “comes into the mix, it is not determinative”.

Group finance director Iain Mackay said: “There was obviously a very welcome change in the rate as applied to bank levy, which kicks in next year, which is helpful. [But with the] corporate rate, the 8pc surcharge, the effect of those two items together is effectively neutral until 2020.”

They were speaking as HSBC announced the sale of its Brazilian business alongside a surprisingly strong 10 per cent rise in half-year profits to $13.6bn (£8.7bn).

The bank said Banco Bradesco would buy its Brazilian operations for $5.2bn, a higher sum than expected and equivalent to 1.8 times the book value. The sale is part of HSBC’s withdrawal from several markets where the bank has not performed as well as hoped, with a sale of its Turkish assets still in progress.

Brazil is a major part of HSBC’s Latin American operations, generating about half of the bank’s $2.25bn net income in the region, and $191m in pre-tax profits. The bank will keep a “modest” corporate banking operation in the country after the sale.

HSBC’s profits were held back in the first-half by an additional $1.5bn of provisions for misconduct, including an extra $1.3bn for upcoming foreign exchange settlements. HSBC is being investigated by authorities in countries including the US, Brazil and South Korea, as well as the EU.

It is also facing private and public legal action over claims of manipulation of interest rate benchmarks including Libor, but is as yet unable to estimate the likely cost of the cases.

Other expected legal bills include costs of up to $700m in Brazilian interest rate claims, $3.6bn for securities litigation in the US, $500m related to its US cards business and $800m in claims around the Bernie Madoff fraud. However, the bank stressed that the outcomes of these cases and the related costs were still highly uncertain.

HSBC said its overall profits for the first six months of the year represented a 2 per cent rise, once the positive effect of currency movements and other one-off items were stripped out.

“We have commenced our work to reduce costs and expect to be able to demonstrate tangible progress in the coming quarters,” said Stuart Gulliver, chief executive. “Fulfilling these actions will also entail a number of one-off transformation costs, some of which will be incurred during the second half of 2015.”

The cost-cutting drive will include up to 25,000 job cuts worldwide. A further 22,000 jobs in the UK will be re-assigned to a new employer later this year as the British retail bank is carved out into a separate ring-fenced unit, headquartered in Birmingham. HSBC is planning to rebrand this unit, potentially reviving the old Midland Bank brand or expanding its successful online name First Direct. The unit could also be floated off on the stock market as a separate entity.

Mr Gulliver said the bank was pouring more resources into its Asian business, with half of all its reallocated capital going to the region, and the remainder being spread more thinly around the rest of the world. When the bank cannot find suitable high-return investments, it will return capital to the shareholders, he said.

Revenue in Hong Kong rose by 10 per cent, on strong retail and wealth management performance, helping drive Asian pre-tax profits up 7 per cent to $8bn. As a result Asia makes the vast majority of the group’s global profits, and contrasts sharply with Europe where adjusted pre-tax profits fell 6pc to $2.8bn as regulatory and compliance costs continued to bite.

Global banking and markets, the firm’s investment banking arm, reported pre-tax profits of $4.8bn, a rise of 12 per cent on the same period last year. The result marks a recovery from a rocky end to 2014, when the investment bank posted worse-than-expected losses on loans.

HSBC’s global private bank, which is under investigation for the tax affairs of its Swiss clients, saw profits fall 4 per cent to $321m.

The firm said its common equity tier 1 ratio was 11.6 per cent, up from 11.3 per cent a year ago, as the bank improves its capital base and shrinks its overall size. Total assets fell from $2.75 trillion a year ago to $2.57 trillion.