HSBC plans US capital release to raise shareholder returns

HSBC is seeking to release $20bn-worth of capital tied up in the United States without upsetting regulators, according to a report by Reuters.

In the past, the bank had been the focus of US regulators for the alleged breach anti-money laundering rules. The capital is earning a meager 1% return up to half of which could be returned to the holding company via asset sales according to analysts and investors.

The bank's investors are currently missing out on higher profits and more secure dividends as a result of this large US balance sheet. The bank earns a return on equity of only 1.4% compared with 5% for HSBC globally and 13% for major US commercial bank rivals according to Deutche Bank.

"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."

The bank has allocated $33bn dollars of capital to its North American businesses, of which just $6bn, mainly the Canada business, is making a healthy return of 9% according to an analysis by Deutsche Bank.

"[...] the scope and scale of capital HSBC has allocated to North America is sub-optimal for shareholders and needs to be revisited," said analysts at Deutsche.

Analysts and investors put the range on how much capital the bank could free up while still keeping a viable US business at $5-10bn.

HSBC Holdings Plc, where the bank pays dividends to investors from, has come under pressure from weaker revenues and regulatory demands to retain capital.

"While we would like to see returns increase, or failing that redeployment of capital into markets outside the U.S., it is for the company to best decide how to achieve this and how to manage its relationship with local regulators," Marwood of RLAM said.

Part of the reason for the amount of capital in the US was the aftermath of the 2008 financial crisis and the collapse of Lehman Brothers. US regulators and others around the world made foreign banks operating in the country boost capital in order to bolster their strength.

Barclays, Deutsche Bank and HSBC have all held billions of dollars more in their US businesses, which has put pressure on profitability.

The drawn-out sale of HSBC’s consumer lending business in a $16bn deal has also contributed to the situation.

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

The Fed have so far approved a remit of a maximum of $2.5 billion of excess cash to its holding company in Britain in 2017 after the bank passed an annual stress test in July.