HSBC walks US regulatory tightrope over US$10 billion of 'trapped' capital

A man walks past a HSBC bank branch in London, Britain.
A man walks past a HSBC bank branch in London, Britain. PHOTO: REUTERS

LONDON (REUTERS) - Britain's HSBC is seeking to release billions of dollars of capital tied up in the United States without upsetting the country's politicians and regulators, senior sources at the bank said.

HSBC, which has been in the sights of US regulators over breaching anti-money laundering rules, has more than US$20 billion of capital in the United States earning a slim 1 per cent return, of which up to half could be returned to the holding company via asset sales, analysts and investors say.

The bank's investors are currently missing out on higher profits and more secure dividends as a result of this hefty US balance sheet. The bank earns a return on equity of just 1.4 per cent on this, compared with 5 per cent for HSBC globally and 13 per cent for major US commercial bank rivals, according to Deutsche Bank research.

"The issue is a valid one, as it appears that the capital in the USA is earning low returns," said Richard Marwood, Senior Fund Manager at Royal London Asset Management, which owns HSBC shares. "As shareholders we are concerned about where companies deploy capital and what the long term returns on that capital are."

HSBC holds so much capital in the United States, in part, because after the 2008 financial crash and the collapse of Lehman Brothers, US regulators and others around the world made foreign banks operating on their soil boost capital to bolster their strength.

This trend has forced banks, including Barclays, Deutsche Bank and HSBC, to hold billions of dollars more in their U.S. businesses, putting pressure on profitability.

It also partly relates to a drawn-out sale process for Household, the consumer lending business HSBC bought in 2003 in an ill-fated $16 billion deal.

The bank's ability to take capital out of the United States is subject to it submitting plans to do so to the Federal Reserve.

HSBC passed an annual US stress test in July, paving the way for the bank to remit a maximum of US$2.5 billion of excess cash in 2017 to its holding company in Britain with the full approval of the Fed. "Any return of capital would always be subject to receiving a non-objection from the Federal Reserve," HSBC chief financial officer Iain Mackay told Reuters in a telephone interview.