When the levy breaks

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George Osborne acknowledges that a bank levy based on global assets risks damaging the UK, but his solution might not appease HSBC.

George Osborne budget-R-600
UK chancellor George Osborne


So it looks like HSBC has finally won one.

During his summer budget speech on Wednesday, UK chancellor George Osborne offered some good news to UK bankers that have been protesting about the bank levy when he admitted it now "risks doing harm unless we change it". Osborne promised: "I will, over the next six years, gradually reduce the bank levy rate – and after that make sure it no longer applies to worldwide balance sheets."

This has been an  absolute sticking point for HSBC – and its shareholders – which argues that the UK levy, by being based on global assets, has unduly punished a bank with big presences in Asia and around the world, and only a much more modest domestic balance sheet in the home market where it is headquartered.

Euromoney understands that a small number of high-level external advisers have been counselling chief executive Stuart Gulliver and chairman Douglas Flint over whether to make good on threats to leave the UK to escape an imposition that analysts had calculated might cost shareholders close to £650 million ($1 billion) per year in perpetuity.

When HSBC announced its strategy review last month, analysts felt convinced that Gulliver and Flint had gone far past making empty threats and were now fully preparing to re-locate the bank back to Hong Kong. Certain planned IT infrastructure investments in the UK have been put on hold. 

Ian Gordon, analyst at Investec, noted: "A decision on domicile is due by year-end; we think the financial logic for HSBC to escape the clutches of the UK (and Europe) is overwhelming. What possible reason is there to stay?"

Blink first

It looked as if the bank’s announcement of a 17% headcount reduction in the UK, amounting to the loss of 8,000 jobs, was just a taste of things to come.

Now Osborne has blinked. It seems clear he would not have made such an announcement had the threat of losing a leader in the global banking industry not hit home.

However, Osborne has not survived so long as finance minister of the UK without learning certain cunning. So while kowtowing to the bankers’ demands, his concession came with a hefty sting in the tail. "To maintain a fair contribution from the banks, I will introduce a new 8% surcharge on bank profits from the January 1 next year."

For 2014, HSBC made £12.2 billion in profits, 17% down on the previous year after paying out £2.4 billion in fines and settlements. So an 8% surcharge on that would have amounted to the thick end of £1 billion.

Osborne had clearly just been getting into his stride, adding: "By getting this balance right, it means we’ll actually raise more from the banks this parliament, but at the same time make our country a more competitive place to do business."

No doubt HSBC and the other UK banks with large overseas operations will be keen to know if that surcharge applies only to profits from their UK operations or from total group profits. The UK might find itself so competitive that it loses the biggest global player in its economy’s biggest single industry sector anyway.

Shift the burden

The initial reading of bank analysts is that the new charge will apply to UK-based profits and therefore shift the burden on to the UK’s only national champion bank, just as it had hoped to raise dividends to shareholders from growing profits.

Citi analysts calculate that for Lloyds the 2015 bank levy charge estimated at £316 million will rise to more than £700 million by 2018 as the effective tax rate on profits shifts the burden away from large international banks on to profitable local ones.

They state: "Over the long term, the UK domestic banks’ contribution through bank levy and bank tax surcharge should double from circa 25% to c50%. The UK challenger banks will also be affected through a higher effective tax rate."

The Citi analysts also note that, in shifting the burden, the cunning Osborne is keen to see the UK population win out.

They add: "We estimate the bank levy charges from the large five UK banks is around £2.5 billion in 2015. Under the proposed new tax rules, total contribution from bank levy and tax surcharge will increase to over £3 billion by 2018."

Osborne might have mollified Gulliver, Flint and Standard Chartered’s Bill Winters while keeping voters onside. However, he might soon be getting a call from António Horta-Osório.