Analysis: As British lender HSBC considers Canada unit sale, antitrust issues loom
05/10/2022 21:04
By Divya Rajagopal
TORONTO, Oct 5 (Reuters) -
As British lender HSBC Plc HSBA.L explores a potential
sale of its Canadian unit, lawyers and analysts say the
country's concentrated banking market could discourage big
domestic banks from bidding as the government has charged the
antitrust regulator to push for more competition.
An HSBC deal would be the first big banking sale in a
decade in Canada, one of the world's most concentrated markets
where the top six banks control about 80% of total assets,
according to Reuters calculations, about double the saturation
of the United States where the top five banks control 40%.
The market is so saturated that Canadian banks are expanding
overseas to reduce their exposure and the Competition Bureau
Canada was granted more powers to prevent further concentration.
The most likely bidders who would have the least trouble
with antitrust regulators are smaller Canadian banks, analysts
said, while a sale to a Chinese bank would not have antitrust
problems but could be scuttled by national security concerns.
Reuters reported on Tuesday that HSBC has tapped
JPMorgan Chase JPM.N to handle a potential sale of Canada's
seventh biggest lender by assets to beef up the parent bank's
returns as demanded by its largest shareholder.
HSBC's Canadian unit could be valued around C$8 billion
($5.9 billion) to C$10 billion ($7.4 billion), analysts
estimate. It generated C$952 million of pre-tax profit in 2021,
according to its annual report.
The universe of potential buyers could already be small
since some large Canadian lenders, including Toronto Dominion
Bank TD.TO , and Bank of Montreal BMO.TO are in the middle of
buying assets in the United States, said James Shannan, senior
equity analyst with Edward Jones.
"No banks in Canada seem to be likely candidates for this
deal," Shannan said. He ruled out any bids by U.S.-based banks,
saying they have been unsuccessful in expanding in Canada due to
high disclosure and capital adequacy requirements.
He said Royal Bank of Canada RY.TO , the country's
biggest lender, has the capacity to do the deal but might not be
attracted by HSBC's business mix.
Gabriel Dechaine, a banking analyst with National Bank
of Canada NA.TO said in a note that regulatory hurdles will be
even higher for RBC than other Canadian banks, although all
would face competition issues.
RBC declined to comment, while TD and BMO did not
respond to Reuters request for comment.
CHINESE BIDDER?
Smaller lenders such as National Bank of Canada NA.TO and
some Chinese suitors are likely to show interest, analysts said.
Keefe, Bruyette & Woods said in a research note that HSBC's
footprint in western Canada could give an instant
diversification to Montreal-based National Bank.
National Bank, which has a market value of C$30.1 billion,
declined to comment.
Dechaine said HSBC's business could be attractive for a
large Chinese bank. But national security issues could
complicate the process.
"Possibly, the federal government would be concerned about
whether acquisition of HSBC Canada by a Chinese-controlled buyer
would enable the Chinese government to have access to the
Canadian banking system," said John F. Clifford, CEO McMillan
LLP.
"I can easily envision the federal government taking a very
deep dive to assess the potential security and public interest
concerns."
HSBC Bank Canada is the biggest international player in
Canada, with commercial banking, personal banking, investment
banking and markets services businesses. Still, its $120 billion
assets in Canada are much smaller than those of National Bank,
Canada's sixth largest, with assets of C$387 billion.
Consumer advocates have long complained about high fees for
everyday banking, and would probably oppose further
consolidation. The average monthly fee on a Canadian checking
account is $11, compared with $7 in the United States, according
to a Reuters analysis that excluded student accounts.
The Competition Bureau Canada said in an email to Reuters
that if the federal ministry of finance in public interest
certifies a banking merger, there will not be any scope for
litigation.
In 1998, the government of Canada blocked RBC's proposed
acquisition of BMO, and TD and CIBC merger on grounds that the
deal would lead to an unacceptable concentration of economic
power.
Since then the only sizeable banking deal to be approved was
Scotiabank's C$3.1 billion purchase of ING Groep's ING.AS
Canadian online bank in 2012.
Nigel D'Souza, an investment analyst with Veritas Investment
Research, said HSBC is unlikely to find a single buyer that can
pass antitrust muster.
"So I think the most likely outcome for the deal to
actually get done is for HSBC assets to be broken up and split
across several of the larger banks," he added.
($1 = 1.3507 Canadian dollars)
(Reporting by Divya Rajagopal
Writing by Denny Thomas
Editing by David Gregorio)
((denny.thomas@thomsonreuters.com; +1 416 301 0464; Reuters
Messaging: @tden10))