HSBC mulls over UK subsidiary spin-off

Amidst proposed ring- fencing rules.

Citing media reports in the UK, Maybank Kim Eng said HSBC Holdings plc may consider a spin- off of its retail and commercial banking operations of its UK subsidiary bank, HSBC Bank plc.

Here's more:

Investors expect the business could float with a market capitalization of about GBP20b, according to the reports. We believe the potential spin-off could be related to the ring- fencing rules proposed by the UK Independent Commission on Banking in Sep 2011.

Under these rules: (i) UK banks should separate their retail banking from their wholesale and investment banking business; (ii) minimum CET1 CAR and total CAR of 10% and 17% for large ring-fenced banks, respectively; and(iii) minimum tier-1 leverage ratio of 3%.

The rules have not been finalized and are expected to be launched before 2019. As at end-Jun 2013, HSBC Bank plc recorded a CET1 CAR, total CAR and leverage ratio of 11.1%, 16.9% and 3.7%, respectively. Based on a 30% float and an estimated market capitalization of GBP20b, the spin-off will help raise the CET1 CAR and leverage ratio of HSBC Bank plc by 3ppts each.

No urgent need of equity replenishment for the group. For the group as a whole, the minimum CET1 CAR requirement proposed by the Prudential Regulation Authority for UK banks will be 7% as effective from 1 Jan 2014 (4.5% minimum ratio + 2.5% conservation buffer).

In addition, the Financial Stability Board will introduce an additional capital charge of 2.5ppts in phases for HSBC, as a global systemic important bank (G-SIB), from 2016 onwards. The core tier-1 CAR of HSBC group under the CRD IV rules improved to 10.6% in Sep 2013.

If we assume a dividend payout ratio of 60%, we estimate that HSBC’s CRD IV core tier-1 CAR will remain above 10% during 2014-15. Hence, HSBC group should have no immediate need to replenish its equity capital.