HSBC sale to RBC ‘a sad day for Canadian mortgage consumers,’ expert says

The rubber-stamped sale of HSBC’s Canadian operations to Royal Bank will lessen competition on mortgage rates, says one analyst who touted the bank’s key role in lowering borrowing costs through its presence in Canada.

Mortgage strategist Robert McLister called it “a sad day for Canadian mortgage consumers.”

He said HSBC had a different model than the major banks in advertising Canada’s lowest and most transparent uninsured mortgage rates. He said the larger banks were regularly 20 to 80-plus basis points higher on fixed and variable rates.

HSBC Canada felt it could offset the impact of lower rates by attracting “well-qualified customers” who defaulted less and had more non-mortgage assets, McLister said.

“They were an everyday low-price lender, which is extremely valuable in the Canadian market,” McLister added, noting the difficulty for smaller financial players in amassing market share in Canada where the Big Six banks are so dominant.

HSBC gave borrowers ‘leverage’

HSBC Canada’s sale to RBC for $13.5 billion passed its final hurdle on Thursday with the approval of Finance Minister Chrystia Freeland. The minister cited the Competition Bureau’s finding in September, when it also granted approval for the deal, that the acquisition would not stifle competition for mortgage rates, which it said “were most frequently driven by competition from Big Five Banks.”

RBC chief executive Dave McKay also said in an interview Thursday that there is extensive competition in Canadian banking and that the deal would not lessen that in “any shape or form.”

“There’s enormous competition in the Canadian marketplace. There’s over 50 banks, there’s credit unions in every province that compete hard, there’s non-financial competitors. There’s new competitors entering this space all the time,” he said.

But McLister said that for Canadians who count one of the big banks as their preferred lender, the “key benefit of HSBC was the gift it gave borrowers in leverage.”

“I’ve spoken to countless customers over the years that would go to the HSBC website, they would find a rate, they would take it to their bank, and generally, the bank would not match the rate, but it would get close enough so that the customer didn’t have to leave the bank or go elsewhere,” McLister said.

HSBC said in a brief update Friday that it and RBC continue to make progress on implementation of the transaction following the federal approval. The deal is expected to officially close in the first quarter of 2024.

Chief executive Noel Quinn said although HSBC has had a presence in Canada for many years, “the reality is that HSBC Canada only has a market share of around two per cent and we cannot prioritize the investment needed to grow it further.”

“It is therefore in the best interests of HSBC Canada’s customers that the bank becomes part of RBC which will be able to take it to the next level,” he said in a statement.

Conditions on RBC

Freeland’s approval carries conditions for RBC, including that none of HSBC Canada’s 4,000 employees be fired within six months of the closing date — or two years in the case of front-line staff. Banking services must continue to be provided at a minimum of 33 HSBC branches for four years.

RBC also agreed to provide $7 billion in financing for affordable housing construction across Canada as part of the conditions of approval.

The federal government has launched a consultation on strengthening competition in the financial sector that will look into questions such as whether mergers between large banks should be formally banned and whether the government should limit how large banks can grow through acquisitions.

Conservative Leader Pierre Poilievre rises to vote on a motion during a session in the House of Commons, Friday, Dec. 8, 2023 in Ottawa. On Thursday, Poilievre pointed to the Competition Bureau’s finding that the bank was a rate disrupter on mortgages, the loss of which could leave Canadians paying higher rates. (Adrian Wyld/The Canadian Press)

Many had called for RBC’s takeover of HSBC Canada to be blocked, arguing it would decrease competition in what is already a heavily concentrated banking sector.

In calling for the deal to be blocked, Conservative Leader Pierre Poilievre said Canada’s banking sector is overly concentrated and the loss of HSBC Canada will only make it worse.

He pointed to the Competition Bureau’s finding that the bank was a rate disrupter on mortgages, the loss of which could leave Canadians paying higher rates.

“The Trudeau Liberals should have supported competition in banking & mortgage lending by blocking the merger. Now all Canadians will pay the price,” he said on X, formerly Twitter, on Thursday.

Ottawa missed opportunity to protect consumers, think-tank says

Freeland responded to Poilievre on the platform, saying that HSBC was leaving Canada.

“By blocking this, Pierre Poilievre would have risked 4,000 workers losing their jobs, investors losing faith in Canada as a place to do business, and 780,000 Canadians losing banking services. That’s not a serious position — it’s reckless & irresponsible.”

Keldon Bester, executive director of the Canadian Anti-Monopoly Project, said Ottawa missed an opportunity “to protect competition and affordability in the banking sector.”

“While commitments related to the financing of affordable housing appear positive, there is little in the way of protecting Canadian homeowners in a higher interest rate environment,” he said in a statement.

Chrystia Freeland’s approval was the last hurdle for the deal after the Competition Bureau approved it in September. (Nathan Denette/The Canadian Press)

Bester said that in approving the transaction, the government could have secured commitments to protect HSBC mortgage customers from price increases on renewal. Instead, he said it appeared Ottawa “settled on ensuring that HSBC customers are well-informed of their limited options going forward.”

Quinn said HSBC felt reassured by RBC that, as part of its long-term growth strategy, the Canadian bank would invest “in building out their own international capabilities to meet the needs of both our individual and corporate clients.”

“Canada is fortunate in that it has many strong banks operating in a highly competitive market,” he said.