- The deal took place amid pressure from a Chinese shareholder
- Analysts hail the “smart” operation
- The bank can return the proceeds from the deal to shareholders
LONDON/TORONTO/NEW YORK, Nov 29 (Reuters) – HSBC ( HSBA.L ) agreed to sell its Canadian business to Royal Bank of Canada ( RY.TO ) for C$13.5 billion ($10 billion) in cash. a path to a potential bumper payout for shareholders later on.
The deal will help RBC consolidate its leadership position in one of the world’s most concentrated banking markets, where the top six lenders control about 80% of bank assets. RBC’s purchase price represents 30% of the value some analysts attribute to HSBC’s Canadian business. Canadian regulators said they would review the deal.
HSBC, which once billed itself as the world’s local bank and built a global network of retail banking businesses, has been trimming them in recent years to improve profits.
HSBC’s exit from Canada is the first major banking deal in Canada since ING ( INGA.AS ) sold its local operations to Bank of Nova Scotia ( BNS.TO ) for C$3.1 billion in 2012.
HSBC’s divestment accelerated amid pressure from its largest shareholder, Ping An Insurance Group, which urged the bank to split its Asian business to boost revenues.
“We decided to sell after a thorough review of the business, which assessed its relative market position in the Canadian market and its strategic fit with the HSBC portfolio,” said chief executive Noel Quinn.
HSBC said after the deal closes, it could return some of the proceeds from the sale to shareholders, which is expected to give the bank $5.7 billion in pre-tax profits through a one-off dividend or buyback from early 2024.
Shares in HSBC rose 4.4%, compared with the FTSE 100 index (.FTSE), which was up 0.5%. Shares of RBC recovered from an early decline to fall 0.2% in the afternoon, while Canada’s benchmark share index rose 0.3%.
RBC, which expects the deal to add 6% to earnings per share in 2024, will finance the acquisition using internal resources. Its core capital ratio will fall to 11.5% from 13.1% currently at closing.
The deal will increase RBC’s assets by C$134 billion to C$2 trillion and add approximately 130 branches to its existing network of 1,200 branches.
Joe Dickerson, an analyst at Jefferies in London, said a big payout could help appease shareholders upset that HSBC is cutting its dividend in 2020 at the suggestion of British regulators.
Investec banking analyst Ian Gordon said: “The recommendation makes a lot of sense. In fact, the business is worth more to RBC than HSBC and the price reflects that.”
The deal also corrects HSBC’s uncharacteristically weak capital position relative to its peers, Gordon said.
The acquisition will allow RBC to gain more market share in its home market, adding 130 branches and more than 780,000 retail and commercial customers. If successful, it would be the first major banking merger in Canada in a decade.
In October, HSBC said it was considering a sale of its Canadian unit to boost revenues after pressure from Ping An.
Analysts have previously said that further consolidation in Canada’s banking market will attract the attention of the antitrust regulator.
Carl De Souza, head of Canadian Banking at DBRS Morningstar, told Reuters the main question about the deal was “how regulatory approval works from a competitive perspective.”
“As part of regulatory approval, they may have to invest in some businesses,” he said.
RBC CEO Dave McKay told reporters that the bank does not anticipate competitive concerns when asked if it would be open to divesting assets.
“We are not aware of any areas that the bureau may be concerned about,” McKay said.
According to Morningstar, the combined assets of RBC and HSBC would account for 25% of Canada’s total banking assets.
HSBC is Canada’s seventh-largest bank with assets of C$125 billion and earned C$490 million before taxes as of June 30, according to its latest financial results. Analysts had valued HSBC’s Canadian business at between 8 and 10 billion Canadian dollars.
HSBC hired JP Morgan ( JPM.N ) to advise on the sale, Reuters previously reported.
(1 US dollar = 1.3444 Canadian dollars)
Reporting by Iain Withers and Lawrence White in London and Pushkala Aripaka in Bengaluru, Saeed Azhar in New York and Kanishka Singh in Washington; Edited by Sinead Cruise, Jane Merriman, Mark Potter and Nick Zieminski
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