HSBC(LSE: HSBA) and Standard Chartered(LSE: STAN) may move theirheadquartersaway from the UK, but theres no place where they can hide. In this context, Id stillbuythe former over the latter, although there are safer options in the marketplace.
Background
HSBChaslaunched an immediate review into whether it should move its headquarters, it emerged on Friday, while Standard Chartered is oneobvious candidate that could relocated to Hong Kong.
HSBCs Douglas Flint told the CNBC that relocating the banks headquartersback to Hong Kong would be potentially interesting.
Such a strategycould do more harm than good to shareholders over the long term, however, butI still believe that HSBC is a safer option than Standard Chartered, and its sharescould easily hit 700p by the end of the year.
At a time when the investment banking model is being reviewed, London remains the capital of financial markets worldwide:its worth considering that investment banks havefaced muchtougher regulations when helping clients float inHong Kong for years now, whilerecord-breaking fines have come from the US.
Reaction
As the regulatory landscape gets tougher andbanks continue to struggle to make their cost of capital, HSBC isreconsidering its domicile, news of which pushed up the stock by 3% on Friday.
We live in a world where allegations of fraud against a bank becomes reality most often than not, and thats the biggest risk when it comes to investing in banks right now.
So, why are investors betting on HSBC, which also surged 4% in early trade on Monday in the wake of spin-off rumours?
Quite simply, its assets portfolio is very attractive and the bank has options with regard to funding and capital allocation.
Spoiled Kids
Bankers arent too different from spoiled kids, and that showed in HSBCs announcement on Friday.
HSBCis also is weighing plans to spin off its British retail bank business, which could be worth between 20bn and 25n, depending on trading multiples assigned to the unit.
The stock has gained almost 7% in less than two trading sessions, and may contine to rally either based on expectations or if changes are swiftly implemented.
What HSBC and Standard Chartered executives should keep in mind, though, is that transparency is needed and they should be based where transparency is granted.
First, Britains legal structure offers reassurance to investors worldwide, while the importance of Londons time zone must not be underestimated.
Second, moving headquarters would not be a cheap option, as HSBC would have to reapply for hundreds of banking licences.
But there is more than economics at stake here reputation is on the line, too.
Just 10 days ahead of the general elections, HSBC may be trying to put pressure on the UK government, but its not the UK government that has changed its approach to regulations since the collapse of Lehman Brothers:the banking compliance systems have changed globally, and regulators have simply decided to tackle some of the most serious issues in the industry such as money laundering, tax evasion and similar crimes that have been favoured by banks behaviour for years.
Some argue thatthis would be a great time for HSBC and Standard Chartered to merge and move their headquarters to Hong Kong — only to make it back to the UK in a few years!
Well, what’s clear is that the banking industry in the UK is faced with asystemic shift of epic proportions, and as such I’dinvest myhard-earned cash in alternative value opportunities, whichoffer market-beatingyieldsand solid capital gains.
There’s much less risk involved than in banks, and trading multiples point to 10% to 15% upside — on an annual basis — from capital appreciation into 2020 for most of our value candidates.Their names are fully disclosedinourFREE report: learn moreby simply clicking here right away!
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.