For $13.5 billion Canadian dollars ($10.04 billion) in cash, HSBC has agreed to sell its Canadian operations to the Royal Bank of Canada, opening the door for a future large dividend payment to shareholders.
In an effort to increase earnings, HSBC has recently scaled back its retail banking operations, which it originally marketed, as the world’s local bank, and expanded into a global network.
Pressure from its largest shareholder Ping An Insurance Group, which has urged HSBC to split off its Asian business, to increase returns, has caused the disposals to pick up speed.
Chief Executive Noel Quinn stated, “We chose to sell after a thorough examination of the business, which assessed its relative market position within the Canadian market and its strategic fit within the HSBC portfolio.
After the transaction closes, HSBC said it may distribute a portion of the sale proceeds to shareholders in the form of a one-time dividend or share repurchase starting in early 2024. The sale is anticipated to generate a pre-tax gain for the bank of $5.7 billion.
The bank cutting dividends in 2020 at the request of British authorities, according to Joe Dickerson, an analyst at Jefferies in London, could go some way toward placating shareholders.
Following the announcement, HSBC’s shares increased by 4%, in comparison to the benchmark FTSE 100 index. FTSE gained 0.7%.
“The deal appears to be extremely logical. In essence, RBC values the company higher than HSBC does, and this is reflected in the pricing “said Ian Gordon, an Investec banking analyst.
According to Gordon, the deal also strengthens what was an abnormally weak capital position in comparison to HSBC’s competitors.
With the addition of 130 new branches and more than 780,000 new retail and business customers, the acquisition will allow RBC to increase its market share in its home market. If successful, it will be Canada’s first significant banking merger in ten years.
In response to pressure from Ping An, HSBC stated in October that it was thinking about selling the Canadian unit.
According to its most recent financial figures, HSBC, the seventh-largest bank in Canada with 125 billion dollars in assets, earned C$490 million before taxes as of June 30. Analysts had estimated the value of HSBC’s Canadian operations at between C$8 billion and C$10 billion.
Given that the Canadian banking industry is highly consolidated, with the top six lenders controlling roughly 80% of all assets, the sale to RBC is likely to come under scrutiny from the country’s antitrust agency.
According to a previous report, HSBC hired JP Morgan, to provide advice on the sale.
