RBC raises competition concerns as it strikes deal to buy HSBC Canada for $13.5B

TORONTO — Royal Bank of Canada has struck a deal to pay $13.5 billion in cash to swallow up HSBC Bank Canada, the seventh largest bank in the country by assets and — since the Big Six banks are largely untouchable — the biggest takeover prize around. 

The deal means one less competitor in an already concentrated market, but chief executive Dave McKay said that while it's a big win for the bank, at less than two per cent 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 takeover, which would see RBC absorb HSBC Canada's 800,000 clients, 4,200 employees, 130 branches and $130 billion in assets, will need approval from the Office of the Superintendent of Financial Institutions, the Competition Bureau, and the Ministry of Finance.

The Department of Finance issued a statement Tuesday saying that 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 per cent 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.”

Overall, the deal gives RBC a chance to add clients in the commercial side, as well to a wealthy client base and to increase exposure to the growing number of immigrants coming to Canada.

“It's a unique, once in a generation opportunity to leverage all the investments we've already made in building a world-class retail and commercial bank,” said McKay.

“That we're bringing in, first and foremost, commercial banking capability, globally connected clients, trade finance and multi-currency accounts, and preferential access to the next generation of clients.”

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.

RBC said it expects the deal to close late in 2023, subject to closing conditions and regulatory approval. 

This report by The Canadian Press was first published Nov. 29, 2022.

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Ian Bickis, The Canadian Press