OREANDA-NEWS. Moving HSBC's headquarters out of the UK is unlikely to have a significant direct impact on the banking group's credit profile, says Fitch Ratings. The group is, however, likely to have to hold more capital on the balance sheet of its UK subsidiary.

Ratings of the group and that of entities within the HSBC group could change if HSBC's financial flexibility was affected, particularly if dividend payments and capital injections between the operating entities, intermediate holding companies and the top holding company were to become constrained.

HSBC's board announced on 24 April that it had begun an official review of whether to maintain its domicile in the UK.

A move to Hong Kong from London is most likely the principal option being explored by the HSBC board because of the bank's long history and significant exposures in the territory. The group's regulatory guidelines are unlikely to change significantly despite the main regulator switching to the Hong Kong Monetary Authority (HKMA) from the Bank of England's Prudential Regulation Authority (PRA). As a global bank with principal subsidiaries in the UK, Hong Kong and US, effective regulation of the bank's key operations would remain shared among several regulators including those in the UK and US.

We do not expect a move to affect the bank's capacity to issue in international markets, nor should it affect the overall fungibility of resources. HSBC's local entities are likely to increase issuance themselves, particularly if they are required to hold bail-in-able debt.

HSBC and its HK subsidiary already will have to hold 2.5% capital buffers for their global and domestic significant importance, respectively. In addition, we expect that the 2.5% countercyclical buffer that the HKMA is phasing in from January 2016 for Hong Kong banks will similarly feed into the calculation of HSBC's blended consolidated buffer, regardless of where it is domiciled. The definition of what constitutes a Hong Kong exposure could, however, be different.

However, this would be the first global systemically important financial institution that comes under HKMA scope as primary regulator, and HKMA is likely to have to increase its resources to effectively regulate the non-Asian activities of HSBC. Notably, HSBC's China exposure reporting would apply to the whole group, and not just the Hong Kong subsidiary, thus increasing the transparency and depth of supervision in this key growth area. In general, having the principal regulator close to the main operations of a bank improves the quality of regulation. However, for groups like HSBC whose exposures spread across and are incorporated in multiple regions, cross-border coordination by its key regulators is critical.

We expect the HKMA to continue to regulate the local Hong Kong subsidiary as conservatively as before. At the same time, we would expect regulatory requirements from the PRA relating to the group's UK subsidiary to increase in the event of such a move. Presently, the PRA's capital and liquidity requirements for the UK operations result in lower capital ratios at HSBC Bank plc (the UK subsidiary) than is likely to be the case were it a standalone bank. This is because they take into account the availability of ordinary support provided and available to it from its parent.

The IDRs of HSBC and its key subsidiaries do not rely on sovereign support. The group's financial strength exceeds our support rating floors for the UK and HK subsidiaries, both of which are likely be withdrawn in due course as the HK and UK authorities are both committed to global policy initiatives on resolution frameworks for systemically important banks. While HSBC's USD2.63trn balance-sheet is nearly 10 times Hong Kong's GDP, one of the largest ratios of any G-SIFI, the regulatory reform agenda has reduced the importance of the home jurisdiction's capacity to provide sovereign support.

Owing to the complexity of HSBC's group structure, it is difficult to assess the full financial impact of such a move. Moving its headquarters would reduce the UK bank levy, but this is just one consideration. Strains on the group's back-office functions and management's time may be significant and increased operational risk may not be desirable as long as the bank is operating under its Deferred Prosecution Agreement.

The bank is due to present a strategy update in June.