RBC’s $10 Billion Deal for HSBC Canada to Win Approval

(Bloomberg) — The Canadian government approved Royal Bank of Canada’s landmark deal to acquire HSBC Holdings Plc’s Canadian operations, handing a major regulatory win to one of North America’s largest financial institutions.

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Finance Minister Chrystia Freeland’s office issued a statement late Thursday allowing the deal, confirming an earlier report by Bloomberg News. Her blessing came with a number of conditions, which include job protections, keeping at least 33 of HSBC’s branches, transition plans for existing clients and a commitment to offer billions in financing for affordable housing.

Royal Bank struck the C$13.5 billion ($10.2 billion) agreement to buy HSBC Canada, the country’s seventh-largest bank, in November 2022. It represents the largest acquisition in Royal Bank’s history, giving it the chance to expand its domestic operations with HSBC’s C$120 billion in assets, which include wealth management, personal and commercial banking.

The Competition Bureau, Canada’s antitrust watchdog, gave its approval in September, stating in a report to the finance minister that the union wouldn’t result in a “substantial lessening or prevention of competition.”

But the deal still required the signoff of the finance minister. It has faced opposition from consumer advocates — who argue HSBC Canada has played an important role in influencing other lenders to lower their mortgage rates — as well as Conservative Party Leader Pierre Poilievre. He has attacked the merger on the grounds that it will increase costs for borrowers.

Climate activists, who object to Royal Bank’s policy on continuing fossil fuel investments, have also opposed the tie-up.

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Job Guarantees

The conditions set by the finance department include a requirement for Royal Bank to support HSBC’s Canadian workforce by creating a banking hub and about 440 new jobs in Vancouver and 100 in Winnipeg, Manitoba. RBC won’t be allowed to let go any HSBC employees for six months after closing the deal, except for terminations for just cause or by mutual agreement.

The government also is requiring steps to ensure a smooth transition for banking clients of HSBC — through fee waivers and transfers of mortgages to Royal Bank — and a requirement that Royal Bank provide C$7 billion in financing for affordable housing in Canada. Royal Bank must also maintain Mandarin and Cantonese banking services at HSBC branches that it keeps open.

Freeland’s statement noted that Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, had no objections to the transaction and recommended approving the sale.

Royal Bank CEO Dave McKay called the approval an “important milestone” and said the bank would work to close the transaction in the first quarter of 2024. It plans to switch HSBC clients and employees to Royal Bank systems on the first day, an undertaking 3,000 people have been working on for the past year, he said.

“This is our largest opportunity in our history,” McKay said in an interview, pointing to the value of the deal, the size of the customer base and the employees RBC is getting from HSBC. “They are scrappy, they work really hard and we want them on our team.”

On the issue of competition on mortgage rates, McKay said HSBC represented just 2% of the Canadian market. HSBC’s Canadian customers live an average of 10 kilometers (6.2 miles) away from an HSBC branch; after the deal closes, they’ll be an average of two kilometers away from a Royal Bank branch.

HSBC’s Priorities

“HSBC has had a presence in Canada for many years and we are grateful for the support we received in the market through our time here,” HSBC CEO Noel Quinn said in an emailed statement.

“However, the reality is that HSBC Canada only has a market share of around 2%, 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.” HSBC said it’s still committed to considering paying a special dividend with money from the sale.

Royal Bank is already Canada’s largest lender, but landing HSBC’s loan book, its branches — which are concentrated in the Toronto and Vancouver regions — and approximately 800,000 customers will give it a significant boost as it looks for new sources of growth.

Earnings at Royal Bank’s Canadian division dropped by 1.3% to C$7.9 billion in the fiscal year ended Oct. 31, which it chalked up to higher provisions for potentially bad loans as well as increased technology and employee costs.

“We view HSBC as an ideal asset for the firm given the substantial cost-saving potential associated with operating within a shared geography,” Canaccord Genuity analysts Matthew Lee and Betty Yang said in a note to clients earlier this week.

Royal Bank executives have said they should be able to slash about 55% of HSBC Canada’s cost base, which will translate into C$740 million in savings, the analysts wrote, adding: “We believe the transaction uniquely positions RBC to attract global, high-value customers and increase the product suite that are offered to current HSBC Canada customers.”

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The deal also comes at a time when Royal Bank’s US personal and commercial banking business, City National Bank, has been struggling with high funding costs and a decline in deposits. Royal Bank injected almost $2 billion in capital to clean up the division’s balance sheet in the third quarter of this year and has brought in a new management team to turn around the Los Angeles-based bank, which it acquired for $5 billion in 2015.

Royal Bank had a Common Equity Tier 1 capital ratio of 14.5% at the end of fiscal 2023. Analysts estimate it should be able to absorb the cost of the deal without issuing additional equity and still remain above the 11.5% capital ratio level required by Canada’s bank regulator.

(Updates with comments from RBC CEO Dave McKay)

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