By Rachel Armstrong and Lisa Jucca
LONDON/HONG KONG (Reuters) - Banking group HSBC Holdings (L:HSBA) has decided to keep its headquarters in Britain, rejecting the option of shifting its center of gravity back to main profit-generating hub Hong Kong after a 10-month review.
The decision by HSBC's board, which Europe's biggest bank said was unanimous, gives a boost to London's status as a global financial center, under threat since the financial crisis of 2007-09 from tougher regulation and rising costs.
Yet Chief Executive Stuart Gulliver immediately warned that the bank could not stick with the status quo were Britain to vote in favor of leaving the European Union in a promised referendum, saying it would consider moving around 1,000 employees from London to Paris.
Some investors had encouraged HSBC to consider moving its HQ from Britain, partly because of a tax on banks' global balance sheets brought in after the financial crisis which had cost it $1.1 billion in 2014.
But following extensive lobbying by the banking industry, British finance minister George Osborne said in July he would halve the levy and, crucially for HSBC, no longer apply it to the overseas assets of British banks, part of efforts to help to keep Britain an attractive place for banks.
The bank denied using the threat of moving to force the British government to rein in the tax.
"We had no negotiation with the government," HSBC Chairman Douglas Flint told BBC radio on Monday. "The government was very well aware of our view ... but there certainly was no pressure put on, or no negotiation".
The waiver on applying the levy to HSBC's overseas assets will only come fully into effect in 2021 at the earliest, leaving the bank exposed to shifting political winds in Britain in the interim, said Investec analyst Ian Gordon in a research note, who nonetheless kept a "buy" rating on its shares.
Asked if the government had caved in to threats by the banks, a spokeswoman for Prime Minister David Cameron said Osborne's budget last year had set out that the levy was introduced to raise revenue and stabilize bank balance sheets. "It served its purpose, it worked but it risks doing harm if left unchanged, he (Osborne) said that clearly last summer.”
A Reuters analysis showed that moving to Hong Kong might have actually increased the bank's tax burden.
LESS AGGRESSIVE
"Arguably, a more benign approach in the UK to the regulation of banks, and a less aggressive tone by politicians, also played an important part in the decision," said Guy de Blonay, a fund manager at Jupiter Asset Management which holds shares in HSBC.
"The bank can now turn its attention to succession planning, likely to revolve around its Chairman Douglas Flint initially (2017), and then CEO Stuart Gulliver (2018)".
The decision to stay in London comes after a tumultuous period for European banks, whose shares have tumbled on fears of a global economic slowdown and the impact on earnings from a prolonged period of low or negative interest rates.
HSBC shares are down more than 30 percent from last April when the group began its headquarters review, hit by China's flagging economic growth and market turmoil.
For Hong Kong, the chance of luring back HSBC, short for Hongkong and Shanghai Banking Corp, to its birthplace and to the heart of its Asian growth strategy has been lost for now.
"London is one of the world's leading international financial centers and home to a large pool of highly skilled, international talent," HSBC said in a statement. "It remains therefore ideally positioned to be the home base for a global financial institution such as HSBC."
Analysts estimated the cost of moving out of London at between $1.5 billion and $2.5 billion, a hefty bill to swallow unless HSBC was able to achieve clear tax and regulatory advantages.
Hong Kong, where HSBC was founded about 150 years ago and where it employs more than 20,000, was considered the strongest relocation option as it accounts for 46 percent of HSBC's pretax profit.
But gyrations in Chinese markets coupled with concerns about China's growing influence over Hong Kong had helped make it more likely the bank would stick to London.
HSBC said it remained committed to its Asia "Pivot" strategy, under which it plans to invest more into China's Pearl River Delta north of Hong Kong which already accounts for half of HSBC's China revenue.
The Hong Kong Monetary Authority, which had earlier said it would welcome an HSBC move to Hong Kong, said it respected the board's decision to maintain the status quo.