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HSBC Rises 4.1% on Canada Unit Sale to Royal Bank of Canada

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HSBC Holdings plc’s (HSBC - Free Report) wholly-owned subsidiary, HSBC Overseas Holdings (UK) Limited, has entered an agreement to sell its Canada banking business — HSBC Canada — to Royal Bank of Canada (RY - Free Report) for a base cash consideration of CA$13.5 billion ($10.1 billion).

Shares of HSBC rallied 4.1% in yesterday’s trading session, reflecting investors’ optimism about the news.

The transaction is conditional on regulatory and governmental approvals, and will close in late 2023.

Per the agreement, RY will acquire all the issued common equity of HSBC Canada. Also, the company will buy all preferred shares and outstanding subordinated debt issued by HSBC Canada for CA$1.1 billion ($0.8 billion) and CA$1 billion ($0.7 billion), respectively. There will also be an adjustment for any additional equity capital contributions made to HSBC Canada.

Financial Implication of the Sale

HSBC is projecting an estimated pre-tax gain of $5.7 billion, including the recycling of $0.6 billion in foreign currency translation reserve losses.

The sale of HSBC Canada’s risk-weighted assets (RWA) and gain on sale will improve HSBC Group’s common equity tier 1 (CET1) ratio by 130 basis points (bps) in addition to the company’s existing capital plans (based on HSBC Group RWAs of $828 billion and HSBC Canada RWAs on a PRA basis of $31 billion).

The company intends to distribute any additional surplus capital from the sale in the form of a one-off dividend and/or share repurchases in 2024, following the completion of the sale. The capital distributions will be in addition to any ongoing share repurchase program.

However, HSBC plans to hedge the retranslation risk of the sale cash proceeds, which might temporarily increase RWAs of up to $10 billion. This might reduce the Group CET1 ratio by up to 20bps.

Markedly, the deal might draw regulators’ scrutiny, as the sale will increase RY’s market share in the Canada banking landscape, which is already dominated by a few large firms.

Deal Rationale

The sale is in line with HSBC’s efforts to reshape underperforming businesses, simplify complex organizations and reduce costs. The sale of the Canada banking business will free up additional capital to invest in other strategic areas. In the past, the company has exited from the U.S. and French retail banking space to focus more on its Asia footprint.

The company believes that its relatively low market share in Canada and its ability to better invest in growth opportunities in other markets make the sale a strategic fit and will unlock significant value for HSBC.

Moreover, the deal does not affect the company’s targets. It reiterated the return on average tangible equity target of 12% or more from 2023 onward. The bank expects a dividend payout ratio of 50% for 2023 and 2024.

Our Take

HSBC has been undertaking measures to bolster its performance, focusing on building operations in Asia, including Hong Kong and China. Also, in sync with this, the company acquired 100% of the issued share capital of AXA Insurance in Singapore for $529 million this February and agreed to acquire L&T Investment Management Limited (LTIM) for $425 million.

Hence, the sale will help in recycling capital to these key markets and strengthen the company’s franchise.

On the NYSE, shares of HSBC and RY have gained 9.4% and 0.4%, respectively, over the past year.

 

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HSBC currently carries a Zacks Rank #2 (Buy), whereas RY carries a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Inorganic Growth Efforts by Other Firms

Mitsubishi UFJ Financial Group, Inc. (MUFG - Free Report) announced plans to acquire respective 100% and 80% stakes in Home Credit B.V.’s units — HC Consumer Finance Philippines, Inc. (HC Philippines) and PT Home Credit Indonesia (HC Indonesia).

This aligns with MUFG’s aim to strengthen its business in Southeast Asia by establishing business platforms in the region by collaborating with partner banks. The move will also help the company in benefitting from the growing consumption in emerging markets amid limited opportunities in Japan due to low rates.


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