The Royal Bank of Canada (RY.TO) and HSBC (HSBA.L) have reached an agreement under which HSBC (HSBA.L) will sell its Canadian operations for C$13.5 billion ($10 billion) in money, opening the door for a potential future large dividend payment to shareholders.
The transaction will assist RBC in maintaining its dominant place in one of the most competitive banking markets in the world, where the top 6 lenders account for nearly 80% of all loans in existence. The amount at which RBC was acquired is a 30% premium over what some analysts had valued HSBC’s Canadian operations. The acquisition will be reviewed, according to Canadian officials.
In an effort to increase earnings, HSBC has recently scaled back its retail banking operations, which it originally marketed as the world’s regional bank and expanded into a global network.
The departure of HSBC from Canada represents the first significant banking transaction in the country since ING sold its local businesses to the Bank of Nova Scotia (BNS.TO) in 2012 for C$3.1 billion.
Pressure from HSBC’s largest investor Ping An Insurance Group, which has asked the bank to split up its Asian division to increase returns, has caused the firm’s disposals to pick up speed.
A thorough analysis of the company, which evaluated its relative position in the market within the Canadian markets and its tactical fit inside the HSBC portfolio, led to the decision to sell, according to Chief Executive Noel Quinn.
After the transaction closes, HSBC said it may distribute a portion of the sale proceeds to shareholders in the form of a one-time dividend or share repurchase starting in early 2024. The sale is anticipated to generate a pre-tax gain for the bank of $5.7 billion.
Following the announcement, HSBC’s shares increased by 4%, outperforming the benchmark FTSE 100 index’s (.FTSE) 0.7% gain. After falling initially, RBC shares rose to close the morning down 0.3%, while the benchmark Canada stock index was down 0.3%.
RBC will finance the acquisition with internal funds and anticipates that it will increase its earnings per share by 6% by 2024. Upon close, its fundamental capital ratio will decrease from 13.1% to 11.5%.
The agreement will add around 130 branches to RBC’s current network and increase its assets by C$134 billion, to C$2 trillion.
According to Joe Dickerson, one of the analysts at Jefferies in London, a sizable payout would help placate shareholders who were upset that HSBC decided to cut dividends in 2020 at the urging of British regulators.
The deal appears to be pretty logical. According to Ian Gordon, a banking analyst at Investec, the company is essentially worth more so to RBC than it is for HSBC, and the pricing reflects this.
Gordon said the transaction also strengthens what was an abnormally weak capital position in comparison to HSBC’s competitors.
With the addition of 130 new branches and much more than 780,000 new retail and business clients, the acquisition will allow RBC to increase its market position in its home market. If completed, it will be Canada’s first significant financial merger in ten years.
In response to pressure from Ping An, HSBC stated in October that it was thinking about selling the Canadian unit.
Analysts have previously predicted that additional contraction in Canada’s banking industry will come under the antitrust regulator’s attention.
The key issue with the merger, according to Carl De Souza, North American FIG at DBRS Morningstar, Head of Canadian Banking, Senior Vice President, is how the regulatory approval plays out from a competitive standpoint.
He noted that they could need to sell some of their investments as a condition of receiving regulatory approval.
According to its most recent financial figures, HSBC, the seventh-largest bank in Canada with 125 billion dollars in assets, generated C$490 million before taxes as of June 30. Analysts had estimated the worth of HSBC’s Canadian operations at between C$8 billion and C$10 billion.
As was previously mentioned, HSBC recruited JP Morgan (JPM.N) to provide advice on the transaction.
