Analysis: RBC tightens grip at home with $10 bln HSBC Canada bid, regulatory risks loom

North American Financial 15 Split

29/11/2022 20:31

By Divya Rajagopal and Saeed Azhar
       TORONTO/NEW YORK, Nov 29 (Reuters) - Royal Bank of
Canada's  RY.TO  swift move to buy HSBC's  HSBA.L  Canada unit
for C$13.5 billion ($10 billion) strengthens its pole position
at home, but faces a long road to clear regulatory challenges.
    The deal is the biggest acquisition for RBC CEO Dave McKay
and marks a departure from peers that have pursued overseas
acquisitions to diversify their earnings
    It comes just as Canada's housing market, one of the bank's
key earnings drivers, faces a sharp downturn due to rising
interest rates and analysts forecast more declines in house
prices. At the same time, the economy is facing recessionary
risks.
    The transaction is also fraught with regulatory risks,
analysts said, though RBC argues that HSBC's Canada business
accounts for just 2% of Canadian banking market share.
    Still, regulators and consumers activists have long derided
Canada's concentrated banking market and the competition bureau
was quick to say it will review the deal.
    The finance minister has the authority to impose any terms
and conditions, the finance department said in a statement.
    The last time a deal of this size was attempted in Canada
was in the early 1990s, when RBC wanted to acquire rival Bank of
Montreal  BMO.TO  but was blocked by regulators from doing so.
    Antitrust experts said RBC will have an uphill climb this
time around too.
    "This regulatory assessment isn't likely to be completed for
some time," Calvin Goldman, former commissioner of Canada's
competition bureau, told Reuters, referring to the latest
deal. Goldman said the competition commissioner will seek views
on the proposed transaction from customers of both the banks as
well as the banks' domestic and overseas competitors.
    "This deal might not be in the league of what we saw in the
90s, but still it is pretty big with systemic impact," Goldman
added.
    RBC CEO Dave McKay told reporters that the bank does not
expect competition concerns, when asked if it would be open to
divesting assets.
     "We not aware of any areas where the bureau is likely to
have concerns," McKay said.
    Canada's top six lenders control 80% of total banking assets
in the country, according to Reuters calculations. By contrast,
the big five banks in the United States control around 40% of
the country's assets. Consumer advocates complain that this has
resulted in customers forking out more for everyday banking.
    Carl De Souza, head of Canadian banking at DBRS Morningstar,
said RBC might have to divest some businesses to satisfy
regulators.
    QUICK MOVE
    Despite the expected regulatory risks, RBC was keen to move
quickly. From its first communication with HSBC, RBC had said it
could close a deal quickly if selected, a person close to the
transaction said.
    HSBC was originally looking to announce a deal by the end of
the year, but RBC said it could be done by the U.S. Thanksgiving
holiday, the source added.
    RBC is paying 9.4 times HSBC's 2024 adjusted earnings, which
KBW analysts said was a steep price, though offset by savings
potentials. That comes even as some of RBC's rivals including
BMO and TD Bank  TD.TO  were distracted negotiating large deals
in the United States to diversify risk and tap into
faster-growing markets.
    Some analysts also raised concerns about HSBC's loan
portfolio, where about 85% of mortgages are residential or home
equity loans and some of which have variable rates. Those
variable mortgages pose a risk as interest rates are expected to
climb further and stay higher for longer, raising the risk of a
higher number of defaults, they added.
    Still, some analysts say RBC has a track record of making
good acquisitions. HSBC's exit from Canada was the first major
banking asset that has come up for sale in the country since ING
 INGA.AS  sold its local business to Bank of Nova Scotia
 BNS.TO  in 2012.
    "They've been patient and the acquisitions that they've made
really don't appear to have been made simply for growth sake,"
said James Shanahan, senior analyst for North American
financials at Edward Jones.
    RBC is betting that the HSBC unit’s strong focus on
international business clients, including those in liquidity
management, trade finance, global cash management and
sustainable finance could bring dividends. HSBC has also been a
preferred bank for many immigrants and expatriates in Canada.
($1 = 1.3603 Canadian dollars)
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UPDATE 5-HSBC eyes bumper dividend from $10 bln sale of Canada
business to RBC      urn:newsml:reuters.com:*:nL4N32P2H7
BREAKINGVIEWS-HSBC’s $10 bln Canada sale is ad for bank breakups
     urn:newsml:reuters.com:*:nL1N32P1A4
BUZZ-Royal Bank of Canada slips on $10 bln deal to buy HSBC's
Canada business     urn:newsml:reuters.com:*:nL4N32P3EK
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 (Additional reporting by David French in New York, editing by
Deepa Babington)
 ((denny.thomas@thomsonreuters.com; +1 416 301 0464;))