HSBC Holdings used new rules on stakes banks hold in other companies to swell its capital. That could be good news for Barclays.
HSBC’s capital numbers were boosted by just over a percentage point thanks to an updated UK regulatory treatment of its 19% stake in Bank of Communications Co, one of China’s largest lenders.
Under guidelines announced by the Prudential Regulation Authority last month, investments of less than 20% are deducted from regulatory capital unless they’re used by the bank to wield “significant influence” over a company.
HSBC’s results should encourage Barclays, which plans to sell down its stake in Barclays Africa Group to less than 20% from 50.1%. Barclays expects that reducing the holding below the PRA threshold, combined with sales of non-core assets, will boost its capital ratio by about a percentage point.
“It all depends on timing of sales and regulatory approvals, but the UK authorities do seem to be smiling on such things,” said Roger Francis, an analyst at Mizuho International in London. “Barclays need to sell down a lot more of BAGL before they can deconsolidate. They still own more than half of it and the timescale they are talking about is still a couple of years.”
In its October 20 statement, the PRA clarified its views on the regulatory treatment of minor stakes held by banks in other companies.
 The treatment depends on whether the investment constitutes a “durable link” that gives the bank “significant influence” over the company, according to the supervisor.
Significant influence is defined as the power to participate in a company’s financial and operating decisions, the PRA said. The supervisor also takes into account the “strategic importance” of the investment, including whether the bank plans to maintain or increase its stake, and what role its management intends to play in running the company.
If these conditions are met, the bank has to treat the stake as a “participation” and consolidate it pro rata as a proportion of the overall bank. Otherwise, it becomes a “non-participatory significant investment” and is deducted from regulatory capital.
The change in treatment resulted in HSBC’s net reported risk-weighted assets related to the Chinese investment falling by $121bn, the bank said in its third-quarter results. That gain more than offset the corresponding $5.6bn deduction from its regulatory capital base. “The net impact on our reported CET1 ratio at September 30, 2016, was an increase of 104 basis points,” the bank said.
In March, Barclays chief executive officer Jes Staley said the “stake in BAGL presents specific challenges to Barclays as owners, such as the level of capital held in respect of BAGL, the international reach of the UK bank levy” and other reasons. “Reducing our interest to a non-controlling, non-consolidated position will also materially improve our CET1 ratio, though not until we deconsolidate Barclays Africa as a regulatory matter.”