HSBC in threat to quit UK over new bank rules

Britain’s beleaguered banking sector was buffeted by bad news yesterday as HSBC reported a big drop in profits and warned that new regulations may force it to quit the UK, while Lloyds Banking Group faced a new battle to maintain its creditworthiness.

Shares in HSBC fell 6 per cent after chief executive Stuart Gulliver said that the sector faces “significant headwinds” from continued economic and political uncertainty in Europe.

Meanwhile Moody’s announced that it was reviewing its rating of Lloyds in light of concerns that chief executive Antonio Horta-Osorio’s sick leave may hinder the bank’s restructuring plan. Shares in Lloyds closed down five per cent.

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HSBC gave its starkest warning to date that new regulations might force it to leave Britain and warned that problems in Europe had hurt growth elsewhere and created a “very challenging” global economy.

The bank joins a long list of financial firms hit by turbulence in the markets, including Barclays, Royal Bank of Scotland, Goldman Sachs and JP Morgan.

Europe’s biggest bank reported a 36 per cent fall in third quarter profits as the eurozone debt crisis hit investment bank income and bad debts jumped almost $1bn in the United States as homeowners stopped paying their mort- gages.

Extra UK regulations could cost $2.5bn a year, which the bank said may be “too high” to stay, though it would delay its decision to move its headquarters back to Hong Kong or elsewhere until at least next year.

“You get to a $2.5bn cost for being UK headquartered. This is a non-trivial decision, you don’t move your head office on a regular basis,” Mr Gulliver said.

HSBC underlined the impact of the eurozone crisis after revealing a 23 per cent slide in earnings from investment banking.

The bank, which employs 50,000 staff in the UK, including around 3,500 in Yorkshire, said its Global Banking and Markets division saw third-quarter revenues fall to $3.2bn from $4.2bn a year ago as uncertainty on the continent took hold.

The group, which has slashed its headcount by 5,000 since March, also saw its bad debt charges rise to $3.8bn, from $3.1bn a year ago, due to worsening housing market conditions in the US.

HSBC became one of the biggest providers of sub-prime mortgages in the US after its purchase of Household Finance eight years ago. It has closed the business and is running down its $50bn loan book.

Ian Gordon, analyst at Evolution Securities, said: “Asian growth is insufficient to fill the hole left by run-off of the Household disaster in the US and investment bank profitability has fallen sharply.

“The challenge of improving the group’s cost efficiency is tortuous.”

Mr Gulliver aims to cut annual costs by $3.5bn and sharpen the bank’s focus on Asia, quitting countries where the bank lacks scale in an attempt to revive profitability.

Elsewhere, the bank said its UK retail banking operations had “performed well” due to increased interest income as a result of higher lending.

The bank said it was on track to exceed its gross new lending targets under the Project Merlin agreement with the Government, after handing out £36.6bn at September 30.

Within that figure, HSBC said lending to SMEs was £38m or 0.4 per cent behind target.

But the group’s core tier-1 capital – a cash buffer in place to protect from future financial crises – reduced by $4.5bn due to the strengthening value of the US dollar.

Richard Hunter, head of equities at Hargreaves Lansdown, said: “The shares have been punished with the rest of the sector, due to economic conditions and regulatory concerns, and have lost 18 per cent over the last six months, as compared to a 6 per cent fall for the wider FTSE 100.”

Lloyds’ rating under review

Lloyds shocked investors last week when it said Antonio Horta-Osorio (right) was taking a break due to stress-related illness, leaving a potential power vacuum at the top of Britain’s biggest retail bank.

Moody’s responded yesterday by announcing a review of the bank’s rating “prompted by the significant upheaval within Lloyds’ senior management”.

It added: “The situation is exacerbated by the fact that it comes at a time of turbulent conditions in the financial markets and the necessity for Lloyds to execute important

tasks, including the EU-mandated sale of branches.”

Lloyds has 15,000 staff in Yorkshire.