FTSE Rises on Financial Stocks with HSBC UK Spin Off

The FTSE 100 has moved back into positive territory, with banks still leading the way.

HSBC is 17.4p higher at 647.1p after Friday’s news it was considering moving its headquarters from the UK, which if it happened would mean the bank not paying the full cost of the bank levy.

It has also been lifted by suggestions over the weekend that it could spin off its UK retail banking business for about £20bn, but analysts are not convinced. Credit Suisse said:

Ahead of the first quarter results on 5 May, and the investor update on 9 June, we do not think this addresses the larger issue of low returns in the global banking and markets/commercial businesses which account for around 70% of group risk weighted assets. We think the stock can be boosted short term, but.. we remain underperform and would require more decisive measures taken on underperforming businesses to turn more positive.

This is not the first time we have heard this type of discussion and note that similar reports were made in Dec 2013 (FT), interestingly with the same £20bn value quoted. A UK listing could benefit the capital position if this were to be sold at a higher book value multiple than the group, but it would also sell a proportion of higher returns to minority shareholders.

With UK ring fencing a reality, we estimate the non-retail UK balance sheet is significantly larger than UK retail (over 70% of UK assets). If HSBC were to exit, then the remainder would be largely non-ring fenced, and could have significantly higher costs of funding.

Spinning off UK retail would give up a significant source of earnings – we estimate retail banking and wealth managment as the most profitable UK business, producing around $2.2bn in 2014 adjusted pretax profit (around 10% of group adjusted pretax profit), with returns on total equity much higher than the group’s. As such we expect a full UK separation would dilute returns.

Meanwhile Standard Chartered, which is also now the suject of speculation it could move away from the UK, is up 29.5p at 1099.5p.

Overall the FTSE 100 is currently up 25.01 points at 7095.71.

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza