HSBC considers windfall dividend from $10 billion sale of Canadian unit to RBC

  • Deal comes under pressure from Chinese shareholders
  • Analysts hail ‘sense’ deal
  • The bank could return the proceeds of the transaction to the shareholders

LONDON/TORONTO/NEW YORK, Nov 29 (Reuters) – HSBC (HSBA.L) has agreed to sell its Canadian business to Royal Bank of Canada (RY.TO) for C$13.5 billion ($10 billion). dollars) in cash, thus paving the way for a potential windfall payment for shareholders later down the line.

The deal will help RBC consolidate its leadership position in one of the most concentrated banking markets in the world, where the six major lenders control approximately 80% of banking assets. RBC’s purchase price reflects a 30% premium to the value some analysts had placed on HSBC’s Canadian operations. Canadian regulators have said they will review the deal.

HSBC, which once billed itself as the world’s local bank and built a global network of retail banking businesses, has in recent years slashed these to try to boost its profits.

HSBC’s exit from Canada marks the first major banking transaction in Canada since ING (INGA.AS) sold its local operations to Bank of Nova Scotia (BNS.TO) for C$3.1 billion in 2012 .

HSBC’s disposals accelerated under pressure from its largest shareholder Ping An Insurance Group, which urged the bank to spin off its Asian business to boost yields.

“We have decided to sell following a thorough review of the business, which assessed its relative position in the Canadian market and its strategic fit with HSBC’s portfolio,” CEO Noel Quinn said. .

HSBC said it could return some of the proceeds from the sale, which is expected to net the bank a pre-tax gain of $5.7 billion, to shareholders via a one-time dividend or buyout beginning in early 2024, after the closing of the agreement.

Shares of HSBC closed 4.4% higher, against a benchmark FTSE 100 index (.FTSE) up 0.5%. RBC shares rallied from early falls to trade down 0.2% by late afternoon, while the benchmark Canadian equity index rose 0.3%.

RBC, which expects the deal to add 6% to its 2024 earnings per share, will finance the acquisition using internal resources. Its Tier 1 capital ratio will fall to 11.5% at closing from 13.1% currently.

The deal will increase RBC’s assets from C$134 billion to C$2 trillion and add approximately 130 branches to its existing network of 1,200 branches.

CONSOLIDATED MARKET

Joe Dickerson, an analyst at Jefferies in London, said a large payout could help appease shareholders exasperated by HSBC’s 2020 dividend cut at the suggestion of UK regulators.

“The transaction seems very sensible. Essentially, the business is worth more to RBC than to HSBC, and the price reflects that,” said Ian Gordon, banking analyst at Investec.

The deal also fixes what was an unusually weak capital position relative to HSBC’s peers, Gordon said.

The purchase will allow RBC to take more market share in its home market, adding 130 branches and more than 780,000 retail and commercial customers. If successful, it will be the first major bank merger in a decade in Canada.

HSBC said in October it was considering selling the Canadian unit as it seeks to boost yields following pressure from Ping An.

Analysts have previously said further consolidation in the Canadian banking market would attract the attention of the antitrust regulator.

Carl De Souza, head of Canadian banking at DBRS Morningstar, told Reuters the big question about the deal was “how the regulatory approval works from a competition perspective.”

“As part of regulatory approval, they may have to divest themselves of some businesses,” he added.

RBC CEO Dave McKay told reporters that the bank did not expect competition concerns, when asked if it would be open to divesting assets.

“We don’t know of any areas where the bureau is likely to have concerns,” McKay said.

The combined assets of RBC and HSBC represent 25% of total Canadian banking assets, according to Morningstar.

HSBC is Canada’s seventh-largest bank with assets of C$125 billion, and it earned C$490 million before tax as of June 30, based on its latest financial results. Analysts had valued HSBC’s business in Canada at C$8 billion to C$10 billion.

HSBC has hired JP Morgan (JPM.N) to advise on the sale, Reuters previously reported.

($1 = 1.3444 Canadian dollars)

Reporting by Iain Withers and Lawrence White in London and Pushkala Aripaka in Bangalore, Saeed Azhar in New York and Kanishka Singh in Washington; Editing by Sinead Cruise, Jane Merriman, Mark Potter and Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.

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