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HSBC eyes bumper dividend from $10 bln sale of Canada business to RBC

[1/2] On August 7, 2019, the HSBC logo was seen on a New York branch bank located within the financial district. REUTERS/Brendan McDermid/File Photo

  • Chinese shareholder pressure forces deal
  • Analysts praise’sensible transaction’
  • Bank could return deal proceeds for shareholders

LONDON/TORONTO, Nov 29 (Reuters) – HSBC (HSBA.L) Royal Bank of Canada has accepted the sale of its Canadian business (RY.TO) For C$13.5 billion ($10 Billion) in cash, the company opens the door to a possible bumper payout for shareholders.

HSBC, once a world-class bank, built a global network for retail banking businesses and claimed to be the “world’s best local bank”. However, profits have been slipping in recent years.

RBC’s acquisition will allow it to consolidate its position in one of the most concentrated banking markets worldwide, where six top lenders control approximately 80% of outstanding loans. RBC’s purchase price represents a 30% premium over the value that some analysts had attributed HSBC Canada.

HSBC’s disposals are now more rapid than ever due to pressure from Ping An Insurance Group, its largest shareholder. This group has urged the bank split its Asian business in order to increase returns.

Chief Executive Noel Quinn stated, “We decided to sale following a thorough assessment of the business which evaluated its relative market place within Canada and its strategic fit within HSBC portfolio.”

HSBC stated that it might return some of its proceeds from the sale, which was expected to net the bank a $5.7 Billion pre-tax gain to shareholders via a one time dividend or buyback starting in 2024.

HSBC shares increased by 4% in the wake of the announcement. This was against a benchmark FTSE 100. (.FTSE) 0.7% increase RBC shares dropped as high as 1.6% in Toronto’s first trade.

CONSOLIDATED MARK

An analyst at Jefferies, London, Joe Dickerson said that a large payout could be a way to appease shareholders who were upset by HSBC’s decision to reduce dividends in 2020 at the suggestion British regulators.

“The transaction appears very sensible. “In essence, the business is more valuable to RBC than to HSBC and the price reflects that,” stated Ian Gordon, a banking analyst at Investec.

Gordon explained that the deal also addresses a uncharacteristically low capital position relative to HSBC’s peers.

RBC will be able to increase its market share in Canada by purchasing 130 branches and adding more than 780,000 commercial and retail customers. It will be Canada’s first major banking merger within a decade if it is successful.

HSBC stated in October that it was looking at selling the Canadian unit to increase its returns after pressure from Ping An.

Analysts had previously indicated that any further consolidation in Canada’s banks market would draw scrutiny from the antitrust regulator.

Carl De Souza is Senior Vice President, Head, Canadian Banking, North American FIG, DBRS Morningstar. He told Reuters that the biggest question about the deal was how the regulatory approval worked out from a competitive perspective.

He added that they may have to sell some businesses in order to get regulatory approval.

Based on its most recent financial results, HSBC is Canada’s seventh largest bank, with assets of C$125 Billion. It earned C$490 Mn before taxes as of June 30. Analysts have valued HSBC Canada’s business at C$8 billion to C$10 trillion.

JP Morgan was hired by HSBC (JPM.N) Reuters previously reported that they were advising on the sale.

($1=1.3444 Canadian dollars)

Reporting by Iain Withers in London and Pushkala Aipaka in Bengaluru. Editing by Sinead Cruise, Jane Merriman, and Mark Potter

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