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Loss of HSBC Canada as competitor in mortgage space could raise costs for everyone, industry watchers say

FILE PHOTO: Real estate sings in Toronto
FILE PHOTO: Real estate sings in Toronto

HSBC Canada has become a feisty competitor to Canada’s largest banks since entering the residential mortgage market in a big way in 2016, undercutting rates and taking market share.

And while Royal Bank of Canada chief executive Dave McKay said he isn’t expecting a challenge from competition authorities over his bank’s $13.5-billion deal announced Tuesday to acquire the independent challenger, market watchers expect the removal of HSBC will be felt.

On Wednesday, mortgage analyst and strategist Rob McLister called HSBC “the most important competitor in the mortgage market,” adding that it was advertising five-year fixed rates this week that were “a tidy 40 (basis points) below RBC.”

Vancouver realtor Steve Saretsky also tweeted about the acquisition Tuesday morning, noting that HSBC Canada was “notorious for undercutting big bank mortgage rates.”

If, as expected, HSBC’s business lines are rolled into RBC’s when the deal closes — the target is late next year — such competition will be difficult to replicate.

HSBC has been operating in Canada since 1981, a period in which several other international banks have come to the market as challengers only to retreat after a few years. Some that remain, such as Capital One, confine their challenges to the Canadian behemoths to high-yield lending products such as credit cards. Others, like Citigroup, focus on niche market segments in Canada, such as corporate services targeting mid-sized companies.

HSBC remains a small player in Canada when compared to the Big Six — McKay pegged the market share around two per cent on a conference call Tuesday — and that fact may shroud its aggressive stance on mortgage lending.

“It doesn’t take us anywhere close to the normal Competition Bureau threshold,” McKay said of combining the two banks. “Therefore, you know, there’s no areas of concern that we’re aware of, that the Competition Bureau should have.”

But that analysis omits a couple of key facts, in McLister’s view. “HSBC is and has been the only competitor with low enough funding costs and big enough scale to consistently challenge the Big 6,” he said.

In addition, the mortgage rates HSBC offers are “widely used as bargaining chips” to negotiate with other banks.

“If they don’t match HSBC’s rates, banks generally discount the customer’s rate to win the deal,” McLister said. “As a result, if HSBC’s exceptional rates did not exist, there’s little doubt that Canadians would potentially incur hundreds of millions of dollars in annual cumulative interest expense.”

If HSBC’s exceptional rates did not exist, there’s little doubt that Canadians would potentially incur hundreds of millions of dollars in annual cumulative interest expense

Rob McLister

Until it was put on the block in October, HSBC Canada was a subsidiary of HSBC Holdings PLC, one of the world’s largest banks, and boasted “global scale” and “an extensive network covering Europe, Asia, North and Latin America, and the Middle East and North Africa.”

The Canadian unit’s contribution to the parent company came largely from its commercial banking, not its retail operations. It represented just three per cent of global customer accounts.

HSBC Canada’s retail book is mostly residential mortgages, at 92 per cent, with the balance split between home equity lines of credit and other personal loans, according to analysts at Canaccord Genuity Corp.

The bank’s annual reports show the mortgage book grew to $33.2 billion in 2021 from $20.6 billion in 2016, mostly uninsured mortgages.

Mortgages are a way for banks to get clients in the door, and then try to sell them more financial products and services.

Scott Chan, a bank analyst at Canaccord Genuity, said in a note to clients this week that HSBC clients tended to be “more affluent” on average than those at the rest of the Big Six including RBC.

The potential for relationships with high-net-worth clients with good credit — who could be sold investments and further credit lines — could make it worthwhile to take a bit less on a mortgage rate, McLister said.

“The model worked,” he said. “Hence they could justify undercutting almost everyone else on uninsured financings.”

Sharon Wilks, a spokesperson for the bank, said HSBC began to base its pricing strategy on “the whole customer relationship” in 2016, with a focus on popular five-year terms and “no haggle” mortgage rates.

“The transparency of our pricing has resonated with consumers and allowed us to grow not only our mortgage market share, but also to acquire new customers with whom we have built deeper multi-product relationships,” she said.

The cost and mix of funding are crucial components that determine the profitability of a mortgage lending portfolio. The lower the cost, the less interest must be charged to maintain the same profit. Banks tend to use deposits to fund their mortgages, while non-bank lenders can’t take deposits and rely on other borrowing, which is often more expensive. HSBC, for example, had access to billions in domestic deposits, as well as covered bonds and a mortgage-backed securities program.  

So while an RBC executive said there were “50 different retail banks in the Canadian market” and described a “ferocious, exceptionally efficient mortgage industry” on the conference call with media Tuesday, few to none of those players can be expected to have the same access to cheap funding as HSBC.

That means the level of competition in the residential mortgage market over the past six years may be difficult to maintain even if RBC’s purchase is blocked by either government, regulatory or competition authorities.

“HSBC will likely be sold to someone regardless,” McLister said in an email, noting that there are no obvious suitors aside from Canada’s largest banks.

“And there’s no guarantee another buyer will maintain its competitive mortgage offerings.”

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