Left: The HSBC Bank branch in Toronto on Nov. 29, 2022, and right, a man walks by an RBC sign near Bay and King in Toronto on March 20, 2019.Duane Cole/Mark Blinch/The Globe and Mail
Royal Bank of Canada RY-T had to agree to several conditions to secure Ottawa’s approval for its takeover of HSBC Bank Canada, but its chief executive says he expects that the agreements will not have a financial impact on the benefits of the deal, as the lender scoops up a prized jewel in the country’s banking sector.
Finance Minister Chrystia Freeland gave the green light on Thursday evening to RBC’s $13.5-billion takeover of Britain-based HSBC Holdings PLC’s Canadian subsidiary, marking the end of the final stage of approvals in the biggest domestic banking deal on record. When the transaction closes, RBC will gain tens of billions of dollars in deposits, mortgages and commercial loans, while also bolstering its services internationally.
To secure the federal government’s approval, RBC, Canada’s largest lender, had to agree to a number of terms, including that it retain certain jobs at HSBC for up to two years, open a global banking hub in Vancouver, maintain a minimum number of HSBC branches and finance affordable-housing projects.
Dave McKay, the lender’s CEO, said in an interview late Thursday that the bank had already been considering similar conditions.
“It’s consistent with how we saw making the transition,” he said. “It was important to the Minister of Finance that we make that commitment in writing, which we agreed to. And we reaffirm the benefits that we articulated in our investor presentation in early December, 2022. None of the commitments materially impacts in any way the commitments we made to investors.”
When HSBC put its Canadian business – the country’s seventh-largest lender – on the auction block in October, 2022, it attracted a flurry of interest from the country’s major banks.
Canada’s banking sector is highly saturated. Gaining market share is a game of inches in which lenders poach customers from one another. The chance to buy HSBC Canada marked the most significant takeover opportunity in the sector since more than two decades ago, when the Canadian government made it more difficult to ink bank acquisitions.
The deal, expected to close in the first calendar quarter next year, will add more than 770,000 clients to RBC’s base of 17 million customers. HSBC Canada’s client base is concentrated in British Columbia and Ontario. Half of its loan book is made up of residential mortgages, and the other half is in commercial and corporate loans.
Because HSBC Canada is a small piece of a larger international lender, more than half of its retail and commercial clients have global banking needs. RBC already operates internationally in the U.S., Britain and 26 other countries, but the deal moves the lender into products and services that it has not offered before.
HSBC Canada provides multicurrency accounts that allow retail customers to save money in euros, Hong Kong dollars and other foreign currencies, and trade on international exchanges through its discount brokerage. With its commercial clients, the bank specializes in trade and supply chain finance.
“As we saw 1.25 million immigrants coming into the country in the past year, they have connectivity back to their home countries, and that will allow us to fully serve them in a unique and differentiated way,” Mr. McKay said.
RBC plans to cross-sell products and services to HSBC clients, such as credit cards and its rewards programs.
The bank paid a premium for that opportunity. It spent 2½ times HSBC Canada’s tangible book value, which is pricey for a bank deal valuation.
But RBC estimates the deal will boost its earnings per share by six per cent in 2024. It also estimates that it will save money by trimming 55 per cent of HSBC Canada’s costs, or about $740-million annually, within two years, largely by combining operations and technology functions.
Canada’s banking sector has grappled with rising costs this year. RBC and its peers have slashed jobs to rein in spending. Most of the big banks have cut their work forces by about two per cent in recent months.
In the near term, RBC is limited in where it can cut costs. The federal government made the bank commit to maintaining HSBC’s employee head-count within six months of the closing date. It must maintain HSBC’s ranks of front-line and financial advisers for at least two years. RBC must also keep at least 33 of HSBC Canada’s 130 branches, and support more than 1,000 jobs at a new global banking hub in Vancouver.
Even before the deal was approved on Thursday, RBC had been contemplating devoting more resources to the West Coast. Mr. McKay said during a fourth-quarter conference call in November that the bank would invest significantly in B.C.’s economy.
The success of the deal in part hinges on RBC retaining HSBC’s customers. When any company is bought out by a rival, there are typically a small number of clients who leave for competitors.
When RBC announced the deal, its head of personal and commercial banking, Neil McLaughlin, said many of HSBC’s relationship managers have been in their roles for more than five years, and have long-standing connections that make customers more likely to stay.
HSBC does not disclose the size of its Canadian customer base in its quarterly results, but HSBC Canada’s assets and balances have dropped slightly since it was put up for sale.
In HSBC Canada’s third-quarter financial results in October, the lender said its total assets had fallen six per cent, to $120.5-billion, from December, 2022. The balance in its retail customer accounts fell to $54.6-billion, from $60.6-billion, while its loans were largely flat.
With the acquisition, the nearest competitor to the Big Six banks is now EQ Bank, a digital banking challenger.
“The large Canadian institutions have very few options for domestic acquisitions, with RBC’s acquisition of HSBC Canada removing one of the last remaining targets,” Canaccord Genuity analyst Matthew Lee said in a note to clients on Monday.