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By Steve Slater and Sinead Cruise
LONDON, May 14 (Reuters) - Being one of the two most important global banks offers benefits to customers and greater resilience, but there is an increasing need to show shareholders that size matters, HSBC’s chairman told Reuters.
Big, complex banks have come under pressure from investors to shrink or break up because the extra costs of managing large institutions, plus a need to hold more capital can outweigh the advantages of scale long considered the holy grail of banking.
“The challenge and the responsibility of management is to demonstrate that scale has benefits,” HSBC Chairman Douglas Flint said on Thursday at the Reuters Regulation Summit.
“You can make the case that it is good for customers but can you make the same case that it is for shareholders?” he said, adding that investors were increasingly asking that question.
HSBC and U.S. rival JPMorgan are designated by regulators as the world’s two most systemically important banks. JPMorgan has rejected calls for its break-up, saying scale has always “defined the winner” in banking and saves it $18 billion a year.
“We would echo what JPMorgan said,” Flint said. “The network effect of being the scale that we are in terms of product groups and geographies gives us access to a flow of business that wouldn’t be available if we didn’t have that network.”
But since the 2007/2009 financial crisis, investors are questioning the benefits of size because returns from big banks are often no better or worse than for smaller firms.
“If you look at the largest banks, it is not demonstrable that they have a higher return on equity than smaller banks. You can actually argue that they don‘t,” Flint said.
HSBC and other big banks are already shrinking to try to improve profitability, cut costs and also to simplify as regulators demand a tighter rein over controls and compliance.
“Everyone has slimmed down corresponding banking relationships because the current responsibility is to not only know your customer, but your customer’s customer, and increasingly your customer’s customer’s customer,” Flint said.
HSBC, Europe’s biggest bank, has sold 77 business in the last four years, and is considering selling more in Brazil, Turkey and elsewhere.
HSBC is also reviewing whether it should move its headquarters from London and has said it would make its decision in a few months. If it moves it would most likely be to Hong Kong, where it was based before moving to London in 1993.
HSBC used to review its home base every three years, but put that process on hold while global regulations and public policy initiatives after the financial crisis created uncertainty.
“There’s now sufficient clarity as to where the journey will end that we could start to reflect again on how you would make a judgement,” said Flint, who has been chairman since 2010.
“It’s very complex, and ultimately the decision comes down to, given the shape of the business, given the desire to have the best people working for you, where would you be best placed to recruit the right talent, have the appropriate flexibility to operate your business across all the places you want to.”
Investors increased pressure for a review after a rise in Britain’s bank tax in March meant HSBC would face a $1.5 billion annual bill.
Flint said there was no one issue that would dictate the decision on headquarters, but it would include the future scope and location of activities, regulation, legal system, taxation, infrastructure and where the bank could get the people it wanted.
“In the last six months there was a lot of shareholder interaction saying surely it’s getting to the point where you have to look at this again because there are aspects of this country or that country that have changed,” he said.
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Editing by Jane Merriman