RBC/HSBC Canada: costly $10bn deal will attract regulatory scrutiny

A self-deprecating Canadian colleague jokes that “worthwhile Canadian initiative” is the most soporific phrase in the English language, But there is plenty to set pulses racing in Royal Bank of Canada’s acquisition of HSBC’s Canadian unit.

The price of C$13.5bn ($10bn) is way ahead of valuations from this column and from brokerage analysts. The deal is billed as a “once in a generation opportunity” by RBC. In Canada’s highly concentrated market, important banking assets rarely come up for sale.

HSBC Canada, the seventh-largest lender in the country with C$134bn of assets, is a profitable business. Focused on western Canada, it churned out C$717mn in net income last year and boasted a 11.7 per cent return on average common equity.

Canadian regulators have resisted further consolidation in an industry dominated by only six big firms.

RBC appears confident its own transaction — confirming its position as Canada’s leading bank — will pass regulatory scrutiny. It is paying the equivalent of 3 times tangible book value. Rival Canadian banks trade on a 1.6 to 2.5 times multiple, implying a healthy control premium.

RBC expects the deal to generate annual pre-tax savings of C$740mn. That would more than cover the implicit takeover premium over average values when taxed and capitalised. It would also bolster by 6 per cent the company’s estimated 2024 consensus earnings per share.

HSBC Canada holds just 2 per cent of the country’s deposits and mortgages. Its strength is in commercial rather than main street lending. The former accounted for about half of the business’s net operating income last year. RBC, with about a fifth of the country’s deposits, can argue that the acquisition will not reduce retail competition significantly.

But Matthew Boswell, Canada’s aggressive competition commissioner, already wants to block Rogers Communications’ C$20bn takeover of Shaw Communications. Any deal enlarging the country’s biggest bank can expect to receive close scrutiny.