Fact Pattern

On 29 November 2022, HSBC entered into an agreement to sell its Canadian business to the Royal Bank of Canada (‘RBC’) in a cash deal for USD $10 billion or CAD $13.5 billion.

Analysis

The news should come as little surprise for those familiar with the mountain of challenges facing HSBC recently. Ping An Insurance Group, who is HSBC’s biggest shareholder with an 8.3 per cent stake in the company, has been publicly advocating for HSBC to break up and spin off its Asian businesses for improving HSBC’s performance and value – a claim which has likely only gained increasing transaction in light of the growing geopolitical tensions between the West and China.

Whilst HSBC is not doing exactly what Ping An is wishing for, it marks another step towards appeasing the insurance group. By selling underperforming business segments such as the retail units in the US and France, HSBC has been able to consolidate its assets for substantial reinvestments in fast growing regions. The bank has already spent billions in acquisitions just in the last two years including, but not limited to, the acquisition of AXA Singapore in Singapore, L&T Investment Management in India, and increasing its equity holdings of HSBC Qinhai Securities from 51% to 90% in China.

Accordingly, the cash sale of HSBC’s profitable, but underperforming, Canadian business may be one of strategy: a further consolidation of cash to fund even more acquisitions in the east.

Implications

However, HSBC and RBC should not celebrate too soon. Canada’s banking industry is dominated by six banks with RBC being the largest by assets and HSBC placing eighth. Accordingly, the proposed acquisition has fuelled antitrust concerns with the Global and Mail referring to it as ‘a slide to monopoly’.

Although large domestic bank mergers are theoretically possible under the Bank Act, it must first gain approval from antitrust regulators. But Canadian regulators have often been less than enthusiastic to approve mergers between large domestic banks with a landmark ruling blocking a merger between RBC and Bank of Montreal (‘BMO’) in 1998. This created the precedent that mergers between the Big Six banks would not be permitted. In fact, Canada’s banking industry has not seen an acquisition of this scale since 1999 when TD Bank Group acquired Canada Trust for CAD $13.1 billion, adjusted for inflation. The next biggest bank acquisition occurred over a decade ago between Scotiabank and ING Bank of Canada for a comparatively modest CAD $3.92 billion, adjusted for inflation. This may explain why major domestic banks such as Toronto-Dominion Bank (‘TD’) and BMO prefer to acquire their targets internationally. It is therefore submitted that even if the acquisition were to be approved by regulators, there is reasonable belief that it will not manifest in its current form.