REG - Royal Bank of Canada - Press Release - Agreement to acquire HSBC Canada

Royal Bank of CanadaAnnouncement

30/11/2022 16:15

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RNS Number : 1234I  Royal Bank of Canada  30 November 2022

 

 

 

 

 

 

 

 

 

 

RBC to strengthen premium Canadian business with agreement to acquire HSBC
Canada

 

Acquisition to position RBC as the bank of choice for globally connected
clients

 

·    Addition of attractive client base and expanded international banking
capabilities

·    Strong cultural fit and aligned approach to disciplined risk
management

·    Strategic deployment of excess capital with attractive financial
returns

 

TORONTO, November 29, 2022 - Royal Bank of Canada (RY on TSX and NYSE) today
announced it has entered into an agreement to acquire HSBC Bank Canada ("HSBC
Canada"), a premier Canadian personal and commercial bank focused on globally
connected clients.

 

Under the terms of the agreement, RBC will acquire 100% of the common shares
of HSBC Canada for an all-cash purchase price of $13.5 billion. All of HSBC
Canada's earnings from June 30, 2022 through close will accrue to RBC 1 .

 

"HSBC Canada offers the opportunity to add a complementary business and client
base in the market we know best and where we can deliver strong returns and
client value given our financial strength and award-winning service," said
Dave McKay, President & CEO, RBC. "This also positions us as the bank of
choice for commercial clients with international needs, newcomers to Canada
and affluent clients who need global banking and wealth management
capabilities. It will help us better serve global clients looking to invest
and grow in Canada."

 

"This acquisition builds on our core domestic retail business and expands our
international product capabilities," said Neil McLaughlin, Group Head,
Personal & Commercial Banking, RBC. "We look forward to welcoming HSBC
Canada's talented employees after the transaction closes and supporting them
as they continue to serve their clients. With strong cultural and risk
alignment and a shared focus on client service, we can build together on HSBC
Canada's leading international products."

 

HSBC Canada has $134 billion in assets as at September 30, 2022, approximately
130 branches and 4,200 full-time equivalent employees. Its commercial bank
brings strong capabilities focused on international business clients,
including in liquidity management, trade finance, global cash management and
sustainable finance. HSBC Canada's wealth and personal banking business serves
an affluent client base, with particular strength in meeting the needs of
international clients with connections to Canada. Its strong balance sheet
includes a well-diversified loan book and an attractive deposit base.

 

Clients to benefit from industry-leading advice, convenience, digital
capabilities and value propositions

·    Combining HSBC Canada's strength in international products with RBC's
breadth of capabilities will provide a best-in-class set of solutions to help
clients meet their financial goals, build their wealth and grow their
businesses.

·    RBC remains committed to ensuring clients get the highest value,
competitive rates and best service.

·    HSBC Canada clients will have access to the largest network of
branches and ATMs in Canada, giving them exceptional convenience in their
everyday banking.

·    RBC consistently wins awards for customer service and satisfaction,
and offers an industry-leading digital banking experience and rewards program.

 

RBC is a globally-recognized Employer of Choice

·    RBC has consistently high employee engagement and ranks among the
best workplaces in Canada 2 .

·    RBC employs over 92,000 full-time and part-time employees globally,
including almost 65,000 full-time equivalent in Canada.

·    RBC is committed to offering an exceptional work experience and
competitive rewards package that inspires employees to achieve both their life
and career goals with RBC, including a full suite of banking, retirement,
savings and benefits programs alongside other resources like flexible work
options, learning and development opportunities and well-being.

·    Diversity & inclusion is core to RBC's Purpose; RBC has
repeatedly been recognized as one of Canada's Best Diversity Employers 3  and
plays an active leadership role in accelerating a more inclusive future.

 

RBC and HSBC Canada share a strong commitment to communities

·    RBC plays a leadership role in community investment, with a total
contribution of more than $140 million globally in fiscal 2021. RBC donates 1%
of its Canadian net income before tax each year, helping our communities grow
with us.

·    RBC has a strong focus on youth, climate, financial wellness and
diversity & inclusion, with the goal of building vibrant and socially
inclusive communities; this includes an investment of $500 million dollars
over 10 years 4  in helping young Canadians prepare for the future of work.

·    RBC and HSBC Canada share a focus on sustainability. RBC is committed
to taking action in helping our clients transition to net zero. RBC has
committed to providing $500 billion in sustainable finance by 2025 5 .

 

Acquisition highlights

The acquisition will enhance RBC's competitiveness on the global stage without
compromising Canadians' access to a competitive, diverse market here at home.

 

The financial sector is highly competitive in Canada, with 50 banks and
hundreds of credit unions and fintechs competing to serve Canadians. HSBC
Canada accounts for around 2% of Canadian deposits and mortgages.

 

Under the terms of the agreement, RBC will acquire 100% of the common shares
of HSBC Canada for an all-cash purchase price of $13.5 billion. All of HSBC
Canada's earnings from June 30, 2022 through close will accrue to RBC 6 . The
purchase price represents a 9.4x multiple of HSBC Canada's estimated 2024
adjusted earnings of $1.4 billion assuming fully realized expense synergies.
On this basis, the acquisition is expected to be approximately 6% EPS
accretive relative to 2024 consensus estimates for RBC 7 . This acquisition is
expected to have an Internal Rate of Return 8  of 14% and a marginal return on
tangible common equity 9  of 27%. RBC expects its CET1 ratio 10  to exceed
11.5% upon close 11 .

 

RBC expects to achieve approximately $740 million, or 55%, in fully realized
annual pre-tax expense synergies based on HSBC Canada's estimated 2024
non-interest expense base, and incur total acquisition and integration costs
of approximately $1 billion. RBC will purchase all of the existing preferred
shares and subordinated debt of HSBC Canada held directly or indirectly by
HSBC Holdings plc at par value.

 

Closing is expected by late 2023 subject to customary closing conditions
including regulatory approvals, obtained in the ordinary course. All amounts
are in Canadian dollars.

 

Conference call

 

RBC will host a conference call on Tuesday, November 29 at 9:00 am ET,
followed by a question and answer period for analysts. Please call between
8:50 and 8:55 am.

 

Participants:

Toll-free dial-in number (Canada/US):    1-866-696-5910

Local dial-in number:     416-340-2217

Participant passcode:    4431273#

 

Webcast link:

https://www.rbc.com/investor-relations/events-and-presentations.html
(https://www.rbc.com/investor-relations/events-and-presentations.html)

 

Instant replay:

Toll-free dial-in number (Canada/US):    1-800-408-3053

Local dial-in number:     905-694-9451

Passcode:                      7155475#

 

Advisors

RBC Capital Markets served as lead and primary financial advisor with Blake,
Cassels & Graydon LLP, Allen & Overy LLP, and Wachtell, Lipton, Rosen
& Katz serving as legal counsel for this transaction. Goldman Sachs &
Co. LLC provided secondary financial advice on certain matters.

 

About RBC

Royal Bank of Canada is a global financial institution with a purpose-driven,
principles-led approach to delivering leading performance. Our success comes
from the 92,000+ employees who leverage their imaginations and insights to
bring our vision, values and strategy to life so we can help our clients
thrive and communities prosper. As Canada's biggest bank and one of the
largest in the world, based on market capitalization, we have a diversified
business model with a focus on innovation and providing exceptional
experiences to our 17 million clients in Canada, the U.S. and 27 other
countries. Learn more at rbc.com.

We are proud to support a broad range of community initiatives through
donations, community investments and employee volunteer activities. See how at
rbc.com/community-social-impact.

 

________________________

Key performance and non-GAAP measures

 

We use a variety of financial measures to evaluate our performance and the
impact of the proposed transaction as described herein. In this press release
we use certain key performance and non-GAAP measures, including
forward-looking non-GAAP measures, that we believe provide useful information
to investors. Readers are cautioned that key performance measures and non-GAAP
measures, including EPS accretion and return on tangible common equity, do not
have any standardized meanings prescribed by GAAP, and therefore may not be
comparable to similar measures disclosed by other financial institutions.

 

Certain of the forward-looking estimated adjusted results presented in this
document are based on analyst consensus estimates of RBC's future adjusted
results as indicated, and we caution that the methodology applied by analysts
to estimate those results may not be consistent with RBC's methodology. The
forward-looking estimated results for HSBC Canada presented in this document
are based on RBC management's estimate of HSBC Canada's future performance and
we caution that these are preliminary estimates based on due diligence and
management projections.

 

Caution regarding forward-looking statements

 

This press release contains forward-looking statements within the meaning of
certain securities laws, including the "safe harbour" provisions of the United
States Private Securities Litigation Reform Act of 1995 and any applicable
Canadian securities legislation, with respect to RBC's and HSBC Canada's
financial performance, beliefs, plans, expectations, and estimates.
Forward-looking statements in this press release may include, but are not
limited to, statements with respect to the expected closing of the proposed
transaction, plans for the combined operations of RBC and HSBC Canada, the
financial, operational and capital impacts of the proposed transaction, our
strategies or future actions, and our objectives and commitments. The
forward-looking information contained in this press release is presented for
the purpose of assisting the holders of our securities and financial analysts
in understanding the proposed transaction and may not be appropriate for other
purposes. Forward looking statements are typically identified by words such as
"believe", "expect", "foresee", "forecast", "anticipate", "intend",
"estimate", "goal", "commit", "target", "objective", "plan" and "project" and
similar expressions of future or conditional verbs such as "will", "may",
"might", "should", "could" or "would".

 

By their very nature, forward-looking statements require us to make
assumptions and are subject to inherent risks and uncertainties, which give
rise to the possibility that our predictions, forecasts, projections,
expectations or conclusions will not prove to be accurate, that our
assumptions may not be correct, that our financial performance, environmental
& social or other objectives, vision and strategic goals will not be
achieved, and that our actual results may differ materially from such
predictions, forecasts, projections, expectations or conclusions.

 

We caution readers not to place undue reliance on these statements as a number
of risk factors could cause our actual results to differ materially from the
expectations expressed in such forward-looking statements. These factors -
many of which are beyond our control and the effects of which can be difficult
to predict - include, but are not limited to: the possibility that the
proposed transaction does not close when expected or at all because of the
occurrence of any event, change or other circumstances that could give rise to
the right of one or both of the parties to terminate the proposed transaction,
including because required regulatory or other approvals and/or other
conditions to closing are not received or satisfied on a

timely basis or at all or are received subject to adverse conditions or
requirements; the possibility that the anticipated benefits from the proposed
transaction, such as being accretive to EPS, creating cross-sell opportunities
and growing our Canadian operations are not realized in the time frame
anticipated or at all as a result of changes in general economic and market
conditions, interest and exchange rates, monetary policy, laws and regulations
(including changes to capital requirements) and their enforcement, and the
degree of competition in the geographic and business areas in which RBC and
HSBC Canada currently operate; the risk that any announcements relating to the
proposed combination could have adverse effects on the market price of our
shares; the possibility that the business of RBC and HSBC Canada may not
perform as expected or in a manner consistent with historical performance; the
ability to promptly and effectively integrate HSBC Canada; our ability to
achieve our capital targets; our ability to cross-sell more products to
customers; reputational risks and the reaction of HSBC Canada's customers and
employees to the transaction; the possibility that the transaction may be more
expensive to complete than anticipated, including as a result of unexpected
factors or events; diversion of management time on transaction-related issues;
material adverse changes in economic and industry conditions; general
competitive, economic, political and market conditions; changes in asset
quality and credit risk; the inability to sustain revenue and earnings growth;
inflation; customer borrowing, repayment, investment and deposit practices;
the impact, extent and timing of technological changes; capital management
activities; and those other factors discussed in the risks sections and Impact
of COVID-19 pandemic section of our 2021 Annual Report and the Risk management
section of our Q3 2022 Report to Shareholders, and the factors discussed in
the Risk section and Impact of COVID-19 and our response section of HSBC
Canada's Annual Report and Accounts 2021 and the Risk section of HSBC Canada's
Third Quarter 2022 Interim Report all of which outline certain key factors and
risks that may affect our future results and our ability to anticipate and
effectively manage risks arising from all of the foregoing factors.

 

We caution that the foregoing list of risk factors is not exhaustive and other
factors could also adversely affect our results. When relying on our
forward-looking statements to make decisions with respect to us, investors and
others should carefully consider the foregoing factors and other uncertainties
and potential events. Material economic assumptions underlying the
forward-looking statements contained in this press release are set out in the
Economic, market and regulatory review and outlook section and for each
business segment under the Strategic priorities and Outlook sections in our
2021 Annual Report, as updated by the Economic, market and regulatory review
and outlook section of our Q3 2022 Report to Shareholders.

 

Assumptions about RBC's and HSBC Canada's current and expected financial
performance including balance sheet, income statement and regulatory capital
figures, expected capital availability for the proposed transaction, expected
closing date of the proposed transaction, expected expense synergies (and
timing to achieve), integration and restructuring costs and process, alignment
of organizational responsibilities, estimated purchase price accounting
(including fair value and credit marks), foreign exchange rates, our assumed
terminal value multiple, and future regulatory capital requirements, including
the Office of the Superintendent of Financial Institutions' announced Basel
III reforms effective in the second quarter of fiscal 2023, were considered in
making the forward-looking statements in this press release including
estimating the pro forma financial impacts to RBC (i.e. the EPS accretion,
internal rate of return to RBC, return on tangible common equity) and the
expected capital impact to RBC.

 

Any forward-looking statements contained in this document represent the views
of RBC only as of the date hereof. Except as required by law, RBC does not
undertake to update any forward-looking statement, whether written or oral,
that may be made from time to time by us or on our behalf.

 

- 30 -

 

Media Relations Contact

Jeff Lanthier, jeff.lanthier@rbc.com (mailto:jeff.lanthier@rbc.com) ,
416-903-7388

 

Investor Relations Contacts

Asim Imran, Vice President, Head of Investor Relations, asim.imran@rbc.com
(mailto:asim.imran@rbc.com) , 416-955-7804

Marco Giurleo, Senior Director, Investor Relations, marco.giurleo@rbc.com
(mailto:marco.giurleo@rbc.com) , 437-239-5374

 1  Excludes a $90 million dividend paid by HSBC Canada in the third quarter
of 2022.

 

 2  Great Place to Work Institute

 3  Mediacorp

 4  RBC Future Launch started in 2017

 5  Sustainable finance refers to financial activities that take into account
environmental, social and governance factors.

 6  Excludes a $90 million dividend paid by HSBC Canada in the third quarter
of 2022.

 7  EPS accretion (consensus) is a non-GAAP measure. EPS accretion (consensus)
metrics are calculated based on analyst expectations for RBC's adjusted EPS,
share buybacks and adjusted net income for 2024, as well as RBC management's
estimates for HSBC Canada's adjusted net income after tax. Adjusted net income
after tax and adjusted EPS are non-GAAP measures. Refer to the Key performance
and non-GAAP measures section.

 8  The Internal Rate of Return (IRR) is the discount rate that makes the net
present value (NPV) of all cash flows equal to zero in a discounted cash flow
analysis.

 9  Return on tangible common equity is a non-GAAP measure. Refer to the Key
performance and non-GAAP measures section.

 10  CET1 is calculated based on OSFI's Capital Adequacy Requirements (CAR)
guideline.

 11  Based on RBC's and HSBC Canada's estimated balance sheets as of an
assumed closing date of October 31, 2023, including transaction related
impacts.

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