HSBC bank on Spadina Ave. in Toronto's Chinatown, on April 9, 2014.Fred Lum/The Globe and Mail
The optics aren’t great, there’s no disputing that. Royal Bank of Canada RY-T wants to buy HSBC Holdings’s HBCYF Canadian operations for $13.5-billion – a takeover that, if approved, would see the country’s largest lender swallow the financial institution that every Big Six bank chief executive officer has salivated over for the last 15 years.
On the surface it all seems so unfair: The big just get bigger, and Canadians get squeezed along the way.
The reality? It isn’t quite that simple. In fact, for this transaction, that narrative barely applies. The Competition Bureau has already studied the proposed takeover six ways to Sunday and gave its blessing.
Beyond that, is bigger always worse? In the aftermath of the U.S. regional banking crisis this spring, many Americans have changed the way they think about their money. Swarms of clients have already moved their accounts to larger institutions they believe can better withstand shocks.
The nature of banking is also changing. Technology giants such as Apple Inc. are out to eat the sector’s lunch, and there are fears that existing banks are, actually, not too large, but not big enough to compete with them over the next decade.
And yet, the recent political rhetoric around RBC and HSBC has been one-dimensional. Federal Conservative Leader Pierre Poilievre is making affordability a central tenet of his 2025 election campaign, and he used that framework to bash the deal during a mini media tour a few weeks back.
“If the biggest bank in Canada simply buys up a growing smaller player, then there’s no hope of ever having more competition in Canadian banking,” he told The Globe and Mail in October. Competition, he added, is what will drive down lending rates and make life more affordable for Canadians, and that is largely why he would block the deal if he was prime minister.
The trouble with this reasoning is that it doesn’t apply to HSBC Canada. This isn’t a startup that has been shaking up the status quo. The bank made $1.2-billion before taxes over the last four quarters, and it operates a lot more like the Big Six lenders than a disruptor.
During its review, the Competition Bureau studied all of RBC’s business lines and also pored over hundreds of individual RBC pricing decisions, ranging from retail banking products (which includes mortgages), to services for small and medium-sized enterprises, to capital markets. It found that pricing was “primarily driven by competition from other financial institutions, and seldom by HSBC Canada offers.”
The bureau also found that HSBC Canada, the country’s seventh-largest lender, “was frequently not a price leader, and may not routinely prompt reactions from rivals even when competing particularly vigorously.” If anything, it was a “price follower” in a number of financial services products.
Anyone who thinks the Competition Bureau is secretly in the bag for big business should know it has shot down bank mergers before, including RBC’s attempt to merge with Bank of Montreal in 1998, as well as Toronto-Dominion Bank’s proposal to combine with Canadian Imperial Bank of Commerce the same year. And when TD bought Canada Trust in 2000, the bureau ruled that remedies were needed because concentration would be too high in certain businesses, such as credit cards.
Competition Commissioner Matthew Boswell isn’t a pushover, either. He recently advised against Rogers Communications Inc.’s purchase of Shaw Communications, and he has talked publicly about how Canada’s competitive intensity is in decline. Yet even with that lens, the RBC-HSBC tie-up does not worry him.
The bureau typically only frets when the combined market share after a merger is 35 per cent or higher, and RBC and HSBC will fall below that threshold “in the majority of relevant local markets, largely due to competition from large domestic banks,” the bureau concluded.
Another fact lost in the populist rhetoric: HSBC Canada put itself up for sale. This was not a privately negotiated deal that caught everyone by surprise. Instead, the global bank has been selling off divisions in other countries as it reconfigures its footprint, including its American and French retail banking arms in 2021, and the Canadian operation launched an auction as part of this restructuring.
That matters because every bank had the right to bid, including global rivals. American lenders either weren’t interested enough or had their own problems to deal with (Citibank is restructuring again, for one) and rival Canadian bidders faced their own constraints.
TD and BMO, the country’s second-and-third-largest banks, were already pursuing blockbuster U.S. acquisitions, and Bank of Nova Scotia, the fourth-largest, didn’t have the capital to pull off such a big takeover. Everyone else had either had trouble writing such a large cheque, or was already heavily exposed to the Canadian market and did not want to increase that weighting.
Still, Finance Minister Chrystia Freeland has a lot of latitude when it comes to approving or blocking the deal. RBC was just fined $7.5-million last week for administrative lapses with its money laundering controls, and while no laundering was actually discovered, she could easily build a case around this to block the deal.
What Ms. Freeland needs to weigh, however, can be summarized in a single question: If not RBC, then who?
HSBC wants out, which means it has no intention of investing more money in Canada. If a deal were outright blocked, any competitive threat that HSBC currently poses to the Big Six will only wane over time.
Accepting that, Ottawa would need someone to step up and buy the business, but there are only a few banks that can stomach both the upfront cheque and the billions of dollars of IT spending that is needed to integrate the lenders.
Of the likely contenders, TD just had its US$13.4-billion acquisition of Memphis-based First Horizon blocked by U.S. regulators because of major money laundering woes. Little has been disclosed about the failures, but these were not administrative lapses like RBC’s. TD has disclosed a financial penalty is coming, and analysts have estimated it will be in the range of US$500-million to US$1-billion.
As for BMO, it just closed its $17-billion acquisition of California-based Bank of the West. The price tag was huge to begin with, and BMO also needed to raise two rounds of fresh capital to backstop the deal.
And even if one of these lenders could buy HSBC Canada, would it really change all that much? A leading Canadian bank would still be getting bigger.
That doesn’t mean this should be a cakewalk for RBC. It’s just that if Ottawa wants to be sensible – and that’s a big if for any political decision in 2023 – it would follow the Competition Bureau’s guidance, ignore the populist debate and score a few political points by extracting some concessions from RBC. Some analysts have already speculated that a bit of compromise by the bank will be necessary for approval.
HSBC Canada was an attractive takeover target because there is a lot of back-end overlap that can be trimmed. Normally, acquirers hope to strip out 20 per cent to 40 per cent of a target bank’s costs by merging back offices, closing bank branches and streamlining technology spending.
When RBC announced it was the winning bidder, it projected that figure would be closer to 55 per cent. That likely means job losses, just as unemployment is rising. U.S. regulators now routinely demand promises to limit these types of cuts, and Ottawa could easily do the same.
If RBC wants to be equally practical, it could be proactive on this front, appreciating that a few concessions would go a long way to massage Ottawa’s optics issue. TD, its chief rival, had to do the very same when buying Canada Trust.
To this end, there are signs RBC is willing to choose compromise over confrontation. The bank reported fourth quarter earnings in late November, and on a conference call with analysts, chief executive officer Dave McKay repeatedly showed deference to the Competition Bureau and the federal finance department.
“We have to respect the overall process in all steps,” he said.
In a statement to The Globe on Thursday, Neil McLaughlin, RBC’s head of personal and commercial banking, reiterated the same idea.
“We are confident about what this transaction will offer clients and Canadians, and we respect the thoughtful process underway,” he said.