Europe's largest bank has ordered a review of whether it should shift its headquarters because of the cost of operating from London and said it would make its decision in a few months.

The review has dealt a blow to the City's reputation as a hub for global finance and has become a political issue ahead of the close-fought British election on Thursday.

HSBC Chief Executive Stuart Gulliver said the review was not meant to be a threat to Prime Minister David Cameron or his main challenger, Labour leader Ed Miliband, but followed "significant pressure" from shareholders.

Gulliver singled out the bank levy, introduced by Cameron in 2010 and raised eight times, as a key concern for investors.

"That's actually going to make it impossible for us to stick to our commitment to make the dividend progressive," he said.

"We have a problem with shareholders who are saying your dividend won't be progressive because actually the levy is jumping in 500 million (dollar) increments and that's jumping faster than you can grow your dividend," he told reporters.

HSBC will pay about $1.5 billion (£991 million) under the levy this year, or roughly 7 percent of expected pretax profits, up from $1.1 billion in 2014.

That could rise above $2 billion if Miliband wins power in the May 7 election because Labour has said it will increase the levy by 800 million pounds a year.

HSBC's first-quarter pretax profit rose a better than expected 4 percent from a year earlier to $7.1 billion after investment banking revenue bounced back to offset an increase rise in compliance and regulation costs.

Like Swiss rival UBS, HSBC's trading desks benefited from a surge in market volatility at the start of the year, which helped its underlying revenue rise 4 percent. Income in the investment bank rose 8 percent.

While HSBC's pretax profit was well above $5.8 billion forecast on average by analysts polled by the bank, HSBC shares were down more than 2 percent by 1040 GMT.

Analysts said it still has a struggle to reduce costs, which rose 6 percent in the first quarter, and improve returns. They said HSBC's results were modest compared to UBS, whose shares jumped 6 percent after its first-quarter profit nearly doubled.

DAMAGED PRIDE

Hong Kong, HSBC's former base, is the most likely destination should the bank move. Gulliver said the Hong Kong Monetary Authority (HKMA) would be able to regulate HSBC as it already regulates about 80 percent of the bank's profits.

Gulliver said the review would take a few months and he would give investors more detail on its options at an investor day on June 9. If the board decides to move it would have to ask investors for their permission.

The bank has been a vocal critic of the higher costs of running a global finance house in the post-crisis environment and has been hit hard by fines and settlements from past misconduct.

Allegations its Swiss private bank helped thousands of rich customers dodge taxes put its top brass at the centre of a political storm earlier this year. Gulliver said the Swiss scandal had not hit the bank's bottom line.

"It has clearly had an impact on people's sense of pride in the firm in which they work, but it has not resulted in any significant outflow of deposits or any reduction in the PBT (profits before tax) of the firm."

Gulliver said the bank could spin off its British retail business and list it separately due to rules forcing it to "ringfence" the business from the rest of the bank from 2019. The rule is designed to shield retail deposits from excessive risk-taking by bank's trading desks.

"If this was a bank in which we ended up simply being a passive equity holder, that we actually had no control whatsoever over its management or its board, that would become a difficult issue because we're not an asset management firm."

(Writing by Carmel Crimmins; Editing by David Holmes and David Clarke)

By Steve Slater and Matt Scuffham