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The deal is expected to close by the end of 2023
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November 29, 2022 • 55 minutes ago • 4 minutes read 15 comments HSBC Holdings PLC signage outside a bank branch in Toronto’s financial district. File photo by Brent Lewin/Bloomberg
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Royal Bank of Canada has signed an agreement to buy the Canadian business of HSBC Holdings PLC in a $13.5 billion cash deal that will strengthen RBC’s lead as Canada’s biggest bank, assuming regulators give the green light to the transaction.
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As part of the deal, which is expected to close in late 2023, RBC will acquire all of HSBC Canada’s shares at a price equivalent to 9.4 times the unit’s 2024 adjusted earnings of $1.4 billion of dollars, RBC said.
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The bank expects the deal to generate $740 million in annual pre-tax synergies, while RBC will pay approximately $1.4 billion in total acquisition and integration costs. All earnings from HSBC Canada after June 30 will go to RBC.
HSBC Canada had $134 billion in assets as of September 30 and has approximately 130 branches and 4,200 employees. Its banking segment holds about two percent of Canadian deposits and mortgages.
“(HSBC Canada) is a fantastic franchise that operates in our home market in businesses that we are very good at, while adding complementary products and a differentiated customer base,” said RBC President and CEO Dave McKay. during an analyst call following the announcement.
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“It’s also a strong cultural fit for both our customers and employees,” McKay added. “The transaction is financially attractive as it also creates immediate value for the strategic deployment of excess capital, highly achievable expense savings and a well-understood revenue cross-selling opportunity.”
On the call, McKay said 50% of HSBC Canada’s commercial banking clients were “globally connected” and that the transaction positioned RBC as the “bank of choice” for clients with international banking and asset management needs. patrimonies, as well as for newcomers. in canada
Neil McLaughlin, group head of personal and commercial banking at Scotiabank, said they will work with HSBC Canada to ensure access to HSBC’s global platform is maintained.
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“Ultimately, we’re committed to making sure the conveniences our customers have now and the value propositions they’re used to remain,” he said.
RBC estimates the deal will add six percent to earnings per share in 2024, as well as offer an internal rate of return of 14 percent. The deal comes eight months after RBC acquired UK-based Brewin Dolphin Holdings Plc. For $2.6 billion in cash in March.
“I am pleased to have reached an agreement with RBC,” HSBC Group Chief Executive Noel Quinn said in a press release. “The deal makes strategic sense for both parties and will take the business to the next level for RBC. We look forward to working closely with RBC’s leadership team to ensure a smooth transition for our clients and colleagues.”
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Linda Seymour, president and chief executive of HSBC Canada, said in a LinkedIn post that there will be no changes to the company’s operations at this time. In a note to clients, HSBC Canada noted that there would be a transition period of several months as the businesses converge.
HSBC Holdings PLC is expected to post a pre-tax gain of $5.7 billion as a result of the deal.
One of the issues that could prevent a perfect transaction is competition issues, said National Bank of Canada analyst Gabriel Dechaine, who also noted that the purchase price was about 30 percent higher than his team I expected.
“The transaction is subject, of course, to regulatory approvals,” Dechaine said in a Nov. 29 note. “A big question facing (RBC)’s search for HSBC Canada is the Competition Bureau’s comments. We estimate that (RBC) will increase its current domestic market share of 21% in loans and deposits at about 200 (basis points) each.”
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Dechaine does not expect RBC to issue shares to cover the transaction, given its significant excess capital.
John Aiken, senior analyst and head of research at Barclays Bank PLC, called the transaction a “once-in-a-generation acquisition in Canadian retail banking” as it adds significant upside to RBC’s earnings and profitability .
“The only fly in the ointment is that, as a bigger player, there could be some regulatory concerns with the Competition Bureau,” Aiken wrote. “While we believe that the deal will ultimately be approved, there is a risk that it will not ultimately be consummated in its current form.”
Aiken added that he expects accumulated earnings at RBC to negate any impact a delay from the regulator might bring.
RBC’s strong capital position had made the Bay Street bank the most likely candidate to win the bid for HSBC Canada, although all of the Big Six reportedly looked under the hood when the financial services giant based in the United Kingdom put the unit up for sale.
RBC shares were flat on Tuesday morning after the announcement.
• Email: shughes@postmedia.com | Twitter: StephHughes95
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