December 5, 2023

Investment Banking

Let Your Investment Banking Do The Walking

Royal Bank agrees to buy HSBC’s Canada unit for $13.5B

Royal Bank of Canada agreed to buy HSBC Holdings Plc’s Canadian unit — the country’s seventh-largest bank — for $13.5 billion in cash, expanding its roster of business clients and bulking up its retail presence on the West Coast as HSBC focuses on Asia.

The purchase gives Royal Bank, already Canada’s largest bank by assets, about 130 more branches, including about 45 in the West Coast province of British Columbia. The Toronto-based company also gains a significant commercial-banking franchise, with many of the clients in industries that trade and bank internationally. 

“HSBC Canada offers the opportunity to add a complementary business and client base in the market we know best and where we can deliver strong returns and client value,” Royal Bank Chief Executive Officer Dave McKay said in a statement Tuesday. “This also positions us as the bank of choice for commercial clients with international needs, newcomers to Canada and affluent clients who need global banking and wealth-management capabilities.”

The move represents a rare major domestic acquisition for one of Canada’s big banks. With mergers in the country’s highly concentrated banking sector blocked by regulators, Canada’s largest lenders have focused their expansion efforts on the U.S. in recent years.

Selling its Canadian business will boost HSBC’s core capital ratio by 130 basis points, putting it in excess of the bank’s target level, giving it the room to hand more money back to shareholders. HSBC said it was “proactively” considering paying a one-time dividend or a fresh stock buyback, which would be a boon for investors who have grown frustrated with the bank’s returns in recent years.

“This transaction is a clear positive for HSBC,” Jefferies Financial Group Inc. analyst Joseph Dickerson said in a note to clients. “The related shareholder repatriation may serve to appease those investors still frustrated that dividends were curtailed in early 2020.”

HSBC’s London-listed shares rose as much as 5.5% on the news. Royal Bank slipped 0.7 per cent to $132.32 at 9:41 a.m. in Toronto.

HSBC has faced a campaign from Ping An Insurance Group Co. of China, its largest shareholder, which has complained about the company’s strategy and poor returns compared to other banks. Ping An has pushed HSBC to consider a spinoff of its Asian operations, a move the bank has rejected.

HSBC CEO Noel Quinn said in a statement that the bank’s strategy remained “unchanged” and that the money raised from the transaction would provide it with financial muscle to “invest in growing our core businesses,” in addition to potentially funding dividends and buybacks.

Last month, Bloomberg reported that HSBC was eyeing potential acquisitions, having already spent billions of dollars buying businesses in Singapore and India, as well as expanding its wealth-management business in mainland China.

What Bloomberg Intelligence says:

“HSBC’s $10.1 billion sale of HSBC Canada to Royal Bank of Canada, in-line with our fair-value estimate, is a timely 130-bp boost to CET1, which had breached the lower end of the bank’s target range. Buybacks and a possible one-time dividend may be considered for the $5.7 billion expected gain, a small incremental positive to the investment thesis.”

–Jonathan Tyce, BI banking analyst

The past year has seen Canadian banks strike the industry’s two largest acquisitions ever, and both were of U.S. firms. Bank of Montreal in December agreed to buy BNP Paribas SA’s Bank of the West unit for US$16.3 billion to extend its presence in the U.S. West. Then, in February, Toronto-Dominion Bank agreed to buy First Horizon Corp. for US$13.4 billion, expanding its footprint in the Southeast.

Royal Bank’s acquisition of HSBC’s Canadian unit may test the Canadian government’s willingness to allow increasing concentration in an industry that already is dominated by only six large firms. Canada’s Competition Bureau has tried to block Rogers Communications Inc.’s $20 billion takeover of Shaw Communications Inc. on the grounds it will weaken competition in the wireless sector, particularly in Western Canada.

HSBC Canada had $134 billion of total assets as of Sept. 30, just over a third of the total of National Bank of Canada, the country’s sixth-largest lender. Commercial banking accounted for almost half of HSBC Canada’s net operating income in its most recent quarter.

Royal Bank said in its statement that the HSBC takeover would increase its global competitiveness “without compromising Canadians’ access to a competitive, diverse market here at home.” HSBC Canada accounts for about 2% of Canadian deposits and mortgages, Royal Bank said, noting that the country has 50 banks and “hundreds of credit unions and fintechs.” 

Royal Bank said it plans to achieve about $740 million in pretax synergies and incur $1 billion in acquisition and integration costs. The deal would add 6 per cent to the company’s estimated 2024 consensus earnings per share, it said. Royal Bank also said its common equity tier one ratio would exceed 11.5 per cent upon the deal’s completion.

The acquisition is expected to be completed by late 2023, subject to regulatory approvals.