Skyline of the financial district

Royal Bank of Canada has signed a deal to acquire HSBC Bank Canada for $13.5 billion in cash.

RBC chief executive Dave McKay said the deal offers the opportunity to add a complementary business and client base.

“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,” McKay said in a statement Tuesday.

“It will help us better serve global clients looking to invest and grow in Canada.”

On a conference call for analysts, RBC stated that it planned to integrate HSBC’s multicurrency bank accounts, as well as HSBC’s foreign currency capabilities within its direct investing platform.

Global banking giant HSBC Holdings PLC said earlier this year that it was reviewing strategic options for its Canadian subsidiary including the possible sale of the operations.

HSBC Group chief executive Noel Quinn said the bank decided to sell the Canadian business after a thorough review that concluded that there was a material value upside from selling.

“The deal makes strategic sense for both parties, and RBC will take the business to the next level,” Quinn said in a statement.

“Our group strategy is unchanged, and closing this transaction will free up additional capital to invest in growing our core businesses and to return to shareholders.”

HSBC Canada has approximately 130 branches and 4,200 full-time equivalent employees. As of Sept. 30, the bank had $134 billion in assets.

HSBC has been winding down its exposure in North America. Last year, the bank sold off its U.S. mass market retail division, cutting its branches in the country from 148 to 58. Back in 2011, HSBC sold its full-service investment advisory business, which included 120 advisors, to National Bank of Canada.

RBC said it expects to close the deal by late 2023 subject to customary conditions, including regulatory approvals from the Office of the Superintendent of Financial Institutions, the Competition Bureau, and the Ministry of Finance.

Under the agreement, all of HSBC Canada’s earnings from June 30, 2022, through to the closing of the deal will accrue to the Canadian bank. The purchase price represents a 9.4x multiple of HSBC Canada’s estimated 2024 adjusted earnings of $1.4 billion, RBC stated.

RBC expects to incur acquisition and integration costs of $1 billion.

Analysts said the deal, which while a higher dollar value than expected, is still compelling.

“We believe that this is an excellent transaction for [RBC] and should garner strong accretions to both earnings and profitability,” said Barclays analyst John Aiken.

“While we believe that the deal will ultimately be approved, there is a risk that it may not ultimately be consummated in its current form.”

The last time Canada’s banking industry saw a deal of this scale was TD Bank Group’s acquisition of Canada Trust in 1999 for about $8 billion, which when adjusted for inflation is the equivalent of about $13.1 billion.

TD made the deal after the federal government blocked proposed mergers between RBC and Bank of Montreal as well as between TD and CIBC in 1998, which established a convention that mergers between the Big Five banks would not be allowed to go ahead.

Competition concerns

The deal means one less competitor in an already concentrated market, but McKay said that while it’s a big win for the bank, at less than 2% of market share he doesn’t see taking over HSBC Canada as negatively affecting competition.

“It doesn’t change any of the market structure,” said McKay on a conference call. “We operate in a hugely competitive banking sector.”

The Department of Finance issued a statement Tuesday saying its review may take into account the rights and interests of consumers and business customers, the impact of the transaction on the level of competition, and its effects on the stability of the financial sector.

While it’s a minor player, the loss of HSBC Canada could have some effect on consumer choice, said Robert Clark, an economics professor at Queen’s University.

“They’re kind of a competitive force in the market, and so they could be exerting pressure on the rates that people get with other lenders.”

He said that past bank mergers going back to the 1990s led to some effect on choice in some local markets, but that the market has changed considerably since then with the growth of online banking.

RBC is aiming for cost savings of about $740 million for 2024, or about 55% of HSBC Canada’s current expense base, through a combination of integrating technology, potential job cuts and branch closures.

The reduction of branches could still have an effect on consumers, especially older Canadians, who still avoid online banking, said Duff Conacher, co-founder of Democracy Watch.

“Further concentration in an already very concentrated oligopoly market is very likely to hurt financial consumers with higher prices and interest rates.”

He said he would like to see RBC release data on its lending practices to minorities, low-income clients and small businesses, as banks have to do in the U.S., and for the federal government to use the data as part of its review of the suitability of the deal.

“Why would you allow a bank that serves people poorly to get bigger?”

NDP Leader Jagmeet Singh also raised concerns about the deal, saying in a statement that the deal is an opportunity for RBC to make more money while hardworking people can’t get ahead.

“Today’s news of the potential merger of two large banks is only going to decrease the options for families in Canada and put more money into the pockets of big bank executives.”

McKay said the deal will create compelling value for shareholders, but also clients and communities.

“This is good for Canada. This is good for taxpayers in Canada who will receive a lot more tax revenue. This is good for shareholders, which are largely pension funds, and that’s average Canadian pension funds.”

He said that while the deal could lead to job cuts, the bank does have about 6,000 open positions and it’s too soon to say how many will end up staying on.

“Our hope is to accommodate the vast majority of the players, there may be some individuals who choose not to be part of this.”