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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