HSBC sounds out spin-off of UK unit

Patrick Jenkins
Logo of HSBC bank
Adam Jeffery | CNBC

HSBC has sounded out investors about a flotation of its U.K. arm, in a move that would realize value from its high street banking business and address regulatory pressures.

The bank has in recent weeks asked investors whether they would support the sale of a sizable stake in the U.K. business. It has also discussed the issue informally at board level, according to three people familiar with the project.

(Read more: Roll up, roll up: UK banks are up for sale)

If Stuart Gulliver, HSBC's chief executive, presses ahead with the plan, it will partially reverse the group's landmark acquisition of the U.K.'s Midland Bank more than 20 years ago. That deal helped HSBC to become Britain's the fourth biggest high-street operator after Lloyds, RBS and Barclays.

Thinking is at an early stage, according to those involved, but the plan would be likely to involve the listing of a minority stake of up to 30 per in the U.K. retail and commercial banking operation. Investors estimate that such a business could float with a market capitalization of about £20 billion ($33 billion).

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Such a move would coincide with a slew of other bank listings in the U.K.. Lloyds Banking Group is preparing to float its TSB subsidiary next year, to comply with EU state aid penalties imposed after its U.K. government rescue. Royal Bank of Scotland's Williams & Glyn's unit is also set to list by 2015 under the same EU penalty regime.

Virgin Money, too, has signaled a desire to list over a similar time frame, while Spain's Santander remains keen to part-float its U.K. subsidiary, though it has shelved plans for the time being. It emerged on Sunday that One Savings Bank, the lender formed from a restructuring of building society Kent Reliance by private equity firm JC Flowers, could also float next year

For HSBC, a carveout of the U.K. business would help to deal with the requirements of the incoming Vickers rules, which demand that U.K. banks ring fence their domestic retail banking operations. Although formal separation is not required, some bankers believe that the strictures of the rules may motivate bigger lenders to break themselves up.

(Read more: Why UK banks may be fighting the 'last war')

Other regulatory changes, such as a tougher capital regime in the U.K. than elsewhere, may also make it logical to spin out a British operation.

HSBC has made little secret about its irritation with the growing costs of being a U.K. regulated bank. The group is expected to pay about £900 million, or 40 percent, of the industry's £2.2 billion bank levy, to the Treasury this year. And it has long bemoaned the ring-fencing rules and steadily rising regulatory capital requirements.

More from the Financial Times:

HSBC set to leap the Vickers ringfence
Rush to board banks' flotation bandwagon
HSBC chief laments lack of senior women

HSBC's U.K. business appears to be performing well. In the first half of 2013, HSBC enerated a pre-tax profit of £2.3 billion, up from £757 million a year earlier, with a return on equity of about 10 percent.

HSBC has toned down its public complaints, calming fears that it might move its headquarters to Hong Kong. Although a listing of the U.K. business could bring a potential move of the group HQ back on to the agenda, people close to the bank said that any question of re-domiciling remained "off the table".

Some HSBC executives believe that floating the U.K. business would also make sense on valuation grounds. It would crystallize a higher rating for the whole group, especially in the light of buoyant investor sentiment towards the U.K. and the prospects for its banking sector.

(Read more: Banking career (a little) less popular 5 years after Lehman)

Shares in Lloyds, the only "pure-play" listed U.K. high-street bank, and a close proxy for the HSBC plan, have risen nearly 70 percent over the past year compared with only 4 percent for HSBC.