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$10B US capital release in sight for HSBC

could bepoised to release billions of dollars in capital that is backstoppingoperations in the U.S. at a marginal return, having seemingly mollifiedregulators in the country.

HSBChas several times failed the U.S. Federal Reserve's stress test, known as theComprehensive Capital Analysis and Review, but it secured a pass grade in thelatest round, giving it the freedom to make a dividend payment out of its U.S.operations in 2017. Sources told Reuters in a Sept. 23 report that plans areunderway to potentially repatriate billions of dollars to the U.K.-basedholding company, although they noted potential obstacles including the politicsof the U.S. presidential election and lingering concern over compliance with a2012 nonprosecution agreement related to money laundering and sanctionsviolations.

Anycapital release would remain subject to Fed approval, HSBC CFO Iain Mackay toldReuters. But the fact that HSBC executives have raised the prospect of freeing"trapped" capital augurs well for those funds being repaid toshareholders, said Robert Sage, an equity analyst at Natixis.

"Alongstanding obstacle to being able to free up this trapped capital in the U.S.is in the process of being removed," Sage said in an interview. "If they come to the marketsaying it's possible we're going to do this, I think it's 99% certain that theyare going to do this. They've been reticent about commenting on how muchcapital to take out of the U.S., but they've said it's big. HSBC don't mincetheir words. If they say it's going to be big, it's going to be big. My senseis it's going to be $10 billion, or something of that order of magnitude."

ADeutsche Bank analysis from late August calculated that HSBC holds a total of$29 billion of capital against top-level U.S. holding company , ofwhich $3 billion to $4 billion could be considered excess cash. Some $20 billionbackstopping HSBC Bank USANA earned a 1.9% return in 2015 and is on course to earn just 1.4%in 2016, the analysts said, compared to projected 2016 returns of 5.0% for HSBCHoldings as a whole and 12.9% for HSBC Bank USA's commercial lending peers inthe U.S.

HSBC'soutsized holding of U.S. capital is attributable to several factors, includingheightened requirements for foreign-owned banks in the wake of the financialcrisis and the protracted offloading of the former Household International.

The2003 Household acquisition has been a millstone around HSBC's neck, enmeshingit in the subprime mortgage crash in the U.S. The fallout of the ill-fated dealhas included significant write-downs of the value of the business, a £12.5 billionrights issue in 2009 and a $1.58 billion settlement earlier in 2016 of a 14-year-old class-actionlawsuit related to Household's activities before the takeover.

HSBCsold off its U.S. credit card operations and an upstate New York branch networkin 2012, but four years later those proceeds remain "trapped" in theU.S., executives observed during the first-half . They hinted that a release ofthose funds might be at hand, with Gulliver pointing to a $2.5 billion sharebuyback funded by the sale of HSBC's Brazilian operations.

"Justas we have said about Brazil, if we don't have the business, we don't need theshares that supported the business," he told analysts. "You canimagine our thinking that there are shares that supported the credit cardbusiness and the upstate New York branches that aren't needed any more."

Yetthe possibility of future share repurchases is not necessarily tied to arelease of capital from the U.S., said Ian Gordon, a bank analyst at Investec,who noted that HSBC's messaging on the matter has been ambiguous.

"Ifail to see the direct linkage between the continuation (or not) of the group'sbuyback program and the U.S. capital release," Gordon said in aninterview. "The capital release would only be a condition for a sharebuyback if the group were capital-constrained."

Atgroup level, HSBC had a common equity Tier 1 ratio of 12.1% as of June 30, althoughit would have risen to 12.8% if the Brazil sale were taken into account. Thebank has a target range of 12% to 13%.