RBC takeover of HSBC Canada unlikely to substantially reduce competition, watchdog finds

Royal Bank of Canada’s proposed acquisition of HSBC Holdings PLC’s Canadian business is not likely to result in a substantial lessening or prevention of competition under the Competition Act, the Competition Bureau said in a review of the merger.

In a report issued Sept. 1 to the Minister of Finance, the competition watchdog outlined its findings regarding the potential competitive effects of the transaction, in which the country’s largest bank, RBC, will acquire HSBC, Canada’s seventh-largest bank, based on a measure of total assets.

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The review is meant to inform federal finance minister Chrystia Freeland’s ongoing review of the proposed transaction.

“While certain evidence indicated that HSBC Canada was a vigorous competitor and a material rival to RBC in the offer of particular financial services, the Bureau found that HSBC Canada’s competitive impact was limited when compared to other financial institutions,” the report said.

The bureau said it found the banks’ post-merger market shares would not be enough for the competition commissioner to challenge based on the unilateral exercise of market power.

It added that HSBC Canada only had limited market penetration in most financial services.

However, it said the proposed merger itself has received significant attention from Canadians, with over 1,500 submissions provided in response to a public request for information issued in May.

The bureau said it reached the conclusion despite finding that Canada’s financial services markets remain concentrated, with the five largest banks accounting for the vast majority of services provided to Canadians.

RBC announced its deal to acquire HSBC Canada for $13.5 billion in cash on Nov. 29, 2022.

In an emailed statement on Sept. 1, the bank said that it’s collaborating with the ongoing reviews by the Office of the Superintendent of Financial Institutions (OSFI) and the Minister of Finance.

“We are keen to see the government of Canada’s due diligence continue in a timely manner and will continue to provide our full support to the reviews being undertaken by OSFI and by the Minister of Finance,” it said.

Chief executive officer Dave McKay welcomed the Competition Bureau’s decision in the regulatory approval process.

In a LinkedIn post, McKay said RBC is preparing for the anticipated completion of the acquisition in the first calendar quarter of 2024.

As part of the deal, RBC will acquire all of HSBC Canada’s shares at a price that works out to 9.4 times the unit’s adjusted 2024 earnings of $1.4 billion. This would pad out RBC’s lead as Canada’s largest bank.

The bank projects the deal will lead to $740 million in annualized pre-tax synergies, while RBC will foot roughly $1.4 billion in total acquisition and integration costs. HSBC Holdings PLC is expected to record a US$5.7 billion pre-tax gain as a result of the deal.

“(HSBC Canada) is a fantastic franchise that operates in our home market in businesses that we are very good at, while also adding complementary products and a differentiated client base,” RBC chief executive Dave McKay said following the announcement in November.

RBC estimated that the transaction will add six per cent to earnings per share in 2024, as well as provide a 14 per cent internal rate of return. The deal came eight months after RBC acquired U.K.-based Brewin Dolphin Holdings PLC for $2.6 billion in cash in March 2022.

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