Royal Bank of Canada has entered an agreement to buy HSBC Holdings PLC’s Canadian business in a $13.5-billion cash deal that will pad RBC’s lead as Canada’s largest bank, assuming regulators give the transaction the green light.
As part of the deal, which is slated to close by late 2023, RBC will acquire all of HSBC Canada’s shares at a price that works out to 9.4 times the unit’s adjusted 2024 earnings of $1.4 billion, RBC said.
The bank projects the deal will lead to $740 million in annualized pre-tax synergies, while RBC will foot roughly $1.4 billion in total acquisition and integration costs. All of HSBC Canada’s earnings from June 30 will accrue to RBC.
HSBC Canada had $134 billion in assets as of Sept. 30 and has approximately 130 branches and 4,200 employees. Its banking segment holds about two per cent 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 also adding complementary products and a differentiated client base,” RBC president and chief executive officer Dave McKay said during an analyst call following the announcement.
“It’s also a strong cultural fit for both our clients and employees,” McKay added. “The transaction is financially compelling as it also creates immediate value for the strategic deployment of excess capital, highly achievable expense savings, and a well-understood revenue cross-sell opportunity.”
During the call, McKay said 50 per cent of HSBC Canada’s commercial banking clients were “globally connected” and that the transaction thus positioned RBC to be the “bank of choice” for clients with international banking and wealth management needs, as well as for newcomers to Canada.
Neil McLaughlin, RBC’s group head of personal and commercial banking, said they would be working with HSBC Canada to ensure access to HSBC’s global platform would be maintained.
“At the bottom line, we are committed to make sure that conveniences that our customers have now, and value propositions that they’re used to, remain,” he said.
RBC estimates that the transaction will add six per cent to earnings per share in 2024, as well as provide a 14 per cent internal rate of return. The deal comes eight months after RBC acquired U.K.-based Brewin Dolphin Holdings Plc. For $2.6 billion in cash in March.
“I am pleased that we have reached an agreement with RBC,” said HSBC Group chief executive officer Noel Quinn in a press release. “The deal makes strategic sense for both parties, and RBC will take the business to the next level. We look forward to working closely with RBC’s leadership team to ensure a smooth transition for our clients and colleagues.”
Linda Seymour, president and chief executive officer at HSBC Canada, said in a LinkedIn post that there will be no change for now with the company’s operations. In a note to customers, HSBC Canada noted there would be a transition period spanning several months as the businesses converge.
HSBC Holdings PLC is expected to record a US$5.7 billion pre-tax gain as a result of the deal.
One issue that could stand in the way of a seamless transaction is competition concerns, said National Bank of Canada analyst Gabriel Dechaine, who also noted the purchase price was about 30 per cent greater than his team expected.
“The transaction is, of course, subject to regulatory approvals,” Dechaine said in a Nov. 29 note. “A big question facing (RBC)’s pursuit of HSBC Canada is feedback from the Competition Bureau. We estimate (RBC) will be increasing its current 21 per cent domestic market share in loans and deposits by about 200 (basis points) each.”
Dechaine doesn’t expect RBC will have to issue shares to cover the transaction, given its substantial 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 brings significant upside to RBC’s earnings and profitability.
“The only fly in the ointment is that, as the largest 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 may not ultimately be consummated in its current form.”
Aiken added that he expects the earnings accrual to RBC to negate any impact that a regulator delay may bring.
RBC’s robust capital position had made the bank Bay Street’s most likely candidate to win the bidding for HSBC Canada, even though all of the Big Six reportedly looked under the hood when the U.K.-based financial services giant put the unit up for sale.
RBC shares traded flat Tuesday morning following the announcement.