HSBC Moving To Luxemburg

| About: HSBC Holdings (HSBC)

Summary

Reasons for relocating the HSBC headquarters.

Advantages to relocating in Luxemburg.

Other companies may follow HSBC and leave London due to the bank tax.

London is going to have serious rival for its investment banking as on June 16, HSBC (NYSE:HSBC) announced that it is in talks to moving its headquarters to Luxembourg from London. Of course in April they announced that they have told the U.K. Treasury that they were considering moving the headquarters to Luxembourg from London and even they weigh the possibility of a British exit. Due to increased British regulation and taxation of the banking sector and other costs associated with being based in London in April shareholders urged HSBC to consider moving its headquarters to Asia.

Even so, some believe that "Chief Executive Stuart Gulliver, may be is making a grave mistake in leaving London. Whilst the bank has been hurt by severe costs and reputational damage, the future remains optimistic should the bank adapt their core strategy. London bears the attraction of being the European epicenter of finance, home to more foreign banks than any other city on the planet."

But more than 300 companies deal from Luxembourg just to slash their tax bills. In March Reuters gave a report that Asia-focused banks Standard Chartered (OTCPK:SCBFF) and HSBC could be tempted to abandon their London headquarters just to avoid a jump in the U.K. bank tax set to cost them a combined $2 billion a year.

Europe's biggest bank has weathered a stream of scandals in the past year, including accusations its Swiss private banking arm helped wealthy clients dodge taxes. On June 2, they said that the company had plans to cut thousands of jobs across its global operations, improve the profitability of its sprawling operations and try to squeeze out up to $5 billion in annual cost cuts by 2017. The bank is slicing the size of its investment bank, exiting Turkey and ratcheting back its franchise in Brazil. These moves would reduce the workforce at Europe's largest bank by about 19% over the next two years.

HSBC has unveiled an 11-point review as part of the bank's wider restructuring efforts to cut costs and shift its focus to growth markets, with a high focus on Asia as the next untapped market. But what is clear that the changes are not likely to lead to a large number of jobs moving to Luxembourg.

By cutting the cost I think HSBC will shift its focus to growth markets, but the high focus will be on Asia as they consider it as "untapped market." So we see many strong reasons beyond this relocation, but in my opinion when the bank leaves the U.K. after more 20 years to cut costs, many other banks will follow suit.

HSBC has been present in Luxembourg since 1977; with several hundred staff comprising 30 nationalities and more than 25 languages, offering a wide range of banking and financial services including Private Banking, Corporate Banking, securities services and asset management.

HSBC is considering this relocation to slash its tax bills, but Luxembourg has following notable advantages:

  • A very large strategic market that has more than 500 million consumers, with 28 EU member states comprising a vast single market. It has free circulation of goods, services and individuals within the EU.
  • A major source of knowledge and innovation, with a highly skilled workforce including 1.3 million researchers and scientists.
  • Considering a strategic position it is ideal being at the heart of Europe.
  • An international hub in the EU, Luxembourg offers flexible business models to rapidly achieve competitive positioning in international markets.
  • Automatic information exchange from 1st January 2015.
  • Luxembourg is managing one of the most widely registered funds for sale in 50 countries.
  • No inheritance tax with low country risk.

Conclusions

London is the home to more foreign banks than any other city on the planet, but Luxembourg is an international hub in the EU which offers flexible business models to rapidly achieve a competitive positioning in international markets. It is ideal because it is at the heart of Europe, so even in the new headquarters the bank will have the opportunities that it had in London.

In the end this relocation will be good for HSBC, and of course the bank has been operating in Luxembourg for many years, this is not something new for them.

In my opinion, Chief Executive Stuart Gulliver is doing the right thing considering this relocation, considering more than 300 companies deal from Luxembourg just to handle their big tax bills. I don't think we can say he is making a grave mistake in leaving London just because this city bears the attraction of being the European epicenter of finance, home to more foreign banks than any other city on the planet. By this relocation, the bank will be able to slash its tax bill and reduce some of its cost.

The U.K. bank tax is set to cost banks big, there is even a possibility that Asia-focused banks Standard Chartered could be tempted to abandon their London headquarters. What HSBC is doing may be seen as an example for other companies.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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