Photo JHVE
Royal Bank of Canada (NYSE:RY) proposed acquisition of $13.5 billion C of HSBC (NYSE:HSBC) Canada operation, is the largest deal of Canadian banks in many years. That alone is likely to have Canadian regulators scrutinizing the deal in a countries where the banking industry is already highly concentrated and RBC is the largest lender.
According to Reuters, Canada’s six major banks control ~80% of total banking assets in the country. Outside of the Big 6, HSBC Canada is one of the larger Canadian banks,” said Carl De Souza, senior vice president, North American Financial Institutions, at DBRS Morningstar.
By comparison, the US banking industry is “much more fragmented”, he said. The five largest banks in the US control ~40% of Americans’ wealth, according to Reuters data.
“There was a lot of talk,” about the transaction, De Souza said. “They have three levels of regulatory approval,” and it’s hard to know exactly what metrics regulators will look at when assessing a deal’s potential impact on competition.
Finance Canada said the Office of the Director General of Financial Institutions will manage the application process and make recommendations to Finance Minister Chrystia Freeland. The Competition Bureau will review the transaction. The Treasury Secretary “must take into account all matters she considers relevant” in whether she approves the deal, the ministry said. speak in a statement.
red blood cells (RY) though, management is confident that the deal will go ahead. In a call with analysts on the day of the deal’s announcement, management said HSBC Canada has only about 2% market share.
“While the acquisition is historically significant and unprecedented in the Canadian banking market, HSBC Canada has less than 2% of the market share nationally compared to RBC’s more than 20% market share in most products sold. his odd,” Written S&P Global Ratings analyst Lidia Parfeniuk in a note.
KBW analyst Mike Rizvanovic upgraded RBC (RY) to Market Performance, due in part to the proposed acquisition, “which we believe will provide the bank with a solid growth opportunity that sets it apart from some of its peers.” He estimates that the acquisition will close “by the end of the fourth quarter of fiscal 2023.” (RBC’s fiscal year ends October 31.)
HSBC Canada has $76 billion in net lending as of September 30, 2022 against RBC $802B of net loans. The acquisition will supplement $134B assets up to $1.84T of RBC assets; it will add $82 billion in deposits on top of RBC’s $1.18 trillion in deposits.
collaborator SA Junius suggested that the bank could face some friction in getting regulatory approval for the merger, as the Canadian government has voiced its opposition to industry consolidation. If regulators asked RY to divest some assets, that could spell trouble for the deal. “Given the plausibility of the merger depending on the expected cost synergies and the higher-than-expected valuation of HSBC Canada, divestment of even a modest portion of the target has could weaken the investment case for trading,” the author says.
