# Analysis-RBC tightens grip at home with $10 billion HSBC Canada bid, regulatory risks loom
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-11-30
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: RBC's Game-Changing HSBC Canada Unit Acquisition
Meta Description: Royal Bank of Canada's C$13.5 billion deal to acquire HSBC's Canada unit bolsters its position domestically. Regulatory hurdles ahead but RBC
URL: https://financedigest.com/analysis-rbc-tightens-grip-at-home-with-10-billion-hsbc-canada-bid-regulatory-risks-loomhtml

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By Divya Rajagopal and Saeed Azhar

TORONTO/NEW YORK (Reuters) – Royal Bank of Canada’s swift move to buy HSBC’s Canada unit for C$13.5 billion ($10 billion) strengthens its pole position at home, but faces a long road to clear regulatory challenges.

The deal is the biggest acquisition for RBC CEO Dave McKay and marks a departure from peers that have pursued overseas acquisitions to diversify their earnings

It comes just as Canada’s housing market, one of the bank’s key earnings drivers, [faces a sharp downturn due to rising interest rates and analysts forecast more declines in house prices](https://www.financedigest.com/bristol-myers-pfizer-abbvie-drugs-likely-to-face-u-s-price-negotiation.html "Bristol Myers, Pfizer, AbbVie drugs likely to face U.S. price negotiation"). At the same time, the economy is [facing recessionary risks](https://www.financedigest.com/german-residential-property-market-faces-risk-of-price-drop-diw-study.html "German residential property market faces risk of price drop – DIW study").

The transaction is also fraught with regulatory risks, analysts said, though RBC argues that HSBC’s Canada business [accounts for just 2% of Canadian banking market share](https://www.financedigest.com/the-sharing-economy-whats-in-it-for-accountants.html "THE SHARING ECONOMY: WHAT’S IN IT FOR ACCOUNTANTS?").

Still, regulators and consumers activists have long derided [Canada’s concentrated banking](https://www.financedigest.com/bank-of-canada-seen-on-hold-even-as-economy-accelerates.html "Bank of Canada seen on hold even as economy accelerates") market and the competition bureau was quick to say it will review the deal.

The [finance minister](https://www.financedigest.com/scottish-finance-minister-kate-forbes-to-run-for-countrys-leadership.html "Scottish finance minister Kate Forbes to run for country’s leadership") has the authority to impose any terms and conditions, the finance department said in a statement.

The last time a deal of this size was attempted in Canada was in the early 1990s, when RBC wanted to [acquire rival Bank](https://www.financedigest.com/hsbc-acquires-british-arm-of-stricken-silicon-valley-bank.html "HSBC acquires British arm of stricken Silicon Valley Bank") of Montreal but was blocked by regulators from doing so.

Antitrust [experts said RBC will have an uphill climb this time around](https://www.financedigest.com/virtual-accounts-leading-payment-expert-calls-for-major-changes-in-wolfsberg-group-guidance-around-on-behalf-of-payments.html "Virtual Accounts: leading payment expert calls for major changes in Wolfsberg Group guidance around “On behalf of” payments") too.

This [regulatory assessment isn’t likely to be completed for some time,”](https://www.financedigest.com/london-reclaims-place-as-preeminent-global-financial-centre-for-the-first-time-since-2013-according-to-global-regulatory-outlook-report-from-duff-phelps.html "London reclaims place as preeminent global financial centre for the first time since 2013, according to Global Regulatory Outlook report from Duff & Phelps") Calvin Goldman, former commissioner of Canada’s competition bureau, told Reuters, referring to the latest deal. Goldman said the competition commissioner will seek views on the proposed transaction from [customers of both the banks](https://www.financedigest.com/christmas-debt-hangovers-how-banks-can-help-customers.html "CHRISTMAS DEBT HANGOVERS: HOW BANKS CAN HELP CUSTOMERS") as well as the banks’ domestic and overseas competitors.

This deal might not be in the league of what we saw in the 90s, but still it is pretty [big with systemic impact,”](https://www.financedigest.com/russia-could-hike-rates-in-2023-if-inflation-risks-have-big-impact-cenbank.html "Russia could hike rates in 2023 if inflation risks have big impact -cenbank") Goldman added.

RBC CEO Dave McKay told [reporters that the bank](https://www.financedigest.com/how-banks-can-avoid-regulatory-reporting-mistakes-with-a-good-dose-of-automation.html "HOW BANKS CAN AVOID REGULATORY REPORTING MISTAKES WITH A GOOD DOSE OF AUTOMATION") does not expect competition concerns, when asked if it would be open to divesting assets.

“We not aware of any areas where the bureau is likely to have concerns,” McKay said.

Canada’s [top six lenders control 80% of total banking](https://www.financedigest.com/testing-waters-hungarys-central-bank-flags-cut-in-top-end-of-rate-corridor.html "Testing waters, Hungary’s central bank flags cut in top end of rate corridor") assets in the country, according to Reuters calculations. By contrast, the big five [banks in the United States control around 40% of the country’s assets](https://www.financedigest.com/asset-managers-on-alert-after-whatsapp-crackdown-on-banks.html "Asset managers on alert after ‘WhatsApp’ crackdown on banks"). Consumer advocates complain that this has resulted in [customers forking out more for everyday banking](https://www.financedigest.com/uk-banks-and-insurers-told-to-step-up-help-for-struggling-customers.html "UK banks and insurers told to step up help for struggling customers").

Carl De Souza, [head of Canadian banking](https://www.financedigest.com/hsbc-appoints-new-markets-head-amid-wider-investment-bank-reshuffle.html "HSBC appoints new markets head amid wider investment bank reshuffle") at DBRS Morningstar, said RBC might have to divest some businesses to satisfy regulators.

QUICK MOVE

[Despite the expected](https://www.financedigest.com/ecb-survey-shows-rising-inflation-expectations-despite-energy-price-falls.html "ECB survey shows rising inflation expectations despite energy price falls") regulatory risks, RBC was keen to move quickly. From its first communication with HSBC, RBC had said it could [close a deal](https://www.financedigest.com/greece-britain-discussing-parthenon-sculptures-return-but-deal-not-close-athens-says.html "Greece, Britain discussing Parthenon Sculptures return but deal not close, Athens says") quickly if selected, a person close to the transaction said.

HSBC was originally looking to announce a [deal by the end](https://www.financedigest.com/soccer-nike-ends-sponsorship-deal-with-spartak-moscow.html "Soccer-Nike ends sponsorship deal with Spartak Moscow") of the year, but RBC said it could be done by the U.S. Thanksgiving holiday, the source added.

RBC is paying 9.4 times HSBC’s 2024 adjusted earnings, which KBW analysts said was a steep price, though offset by savings potentials. That comes even as some of RBC’s rivals including BMO and TD [Bank were distracted negotiating large deals in the United States to diversify risk](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") and tap into faster-growing markets.

Some analysts also raised concerns about HSBC’s loan portfolio, where about 85% of mortgages are residential or [home equity loans](https://www.financedigest.com/home-equity-made-simple-things-to-know-before-applying-for-loans.html "Home Equity Made Simple – Things to Know Before Applying for Loans") and some of which have variable rates. Those variable mortgages pose a risk as interest [rates are expected to climb further and stay higher](https://www.financedigest.com/wall-st-indexes-mixed-treasury-yields-tick-up-as-higher-rates-loom.html "Wall St indexes mixed, Treasury yields tick up as higher rates loom") for longer, raising the risk of a higher number of defaults, they added.

Still, some analysts [say RBC has a track](https://www.financedigest.com/russias-largest-lender-sberbank-on-track-to-profitability-says-ceo.html "Russia’s largest lender Sberbank on track to profitability, says CEO") record of making good acquisitions. HSBC’s exit from Canada was the first major banking asset that has [come up for sale in the country](https://www.financedigest.com/buyers-shun-city-centres-for-country-villas-when-it-comes-to-lifestyle-investment-in-iberia.html "BUYERS SHUN CITY CENTRES FOR COUNTRY VILLAS WHEN IT COMES TO LIFESTYLE INVESTMENT IN IBERIA") since ING sold its local business to Bank of Nova Scotia in 2012.

They’ve been patient and the acquisitions that they’ve made really don’t appear to have been made simply for growth sake,” said James Shanahan, [senior analyst for North American financials](https://www.financedigest.com/financial-risks-of-climate-change-overplayed-senior-hsbc-banker-says.html "Financial risks of climate change overplayed, senior HSBC banker says") at Edward Jones.

RBC is betting that the HSBC unit’s strong focus on international business clients, including those in [liquidity management](https://www.financedigest.com/britains-post-brexit-asset-management-revamp-eyes-liquidity-tokenisation.html "Britain’s post-Brexit asset management revamp eyes liquidity, tokenisation"), trade finance, global cash management and sustainable finance could bring dividends. [HSBC has also been a preferred bank](https://www.financedigest.com/hsbc-ups-price-targets-on-greek-banks-with-eurobank-piraeus-top-picks.html "HSBC ups price targets on Greek banks, with Eurobank, Piraeus top picks") for many immigrants and expatriates in Canada.

($1 = 1.3603 Canadian dollars)

(Additional reporting by David French in New York, editing by Deepa Babington)


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