Deal comes amid pressure from Chinese shareholder
Analysts hail 'sensible' transaction
Bank could return deal proceeds to shareholders
(Adds analyst comment, RBC share open)
By Lawrence White, Iain Withers and Divya Rajagopal
LONDON/TORONTO, Nov 29 (Reuters) - HSBC has agreed to sell its business in Canada to Royal Bank of Canada for C$13.5 billion ($10 billion) in cash, paving the way for a potential bumper payout for shareholders later down the line.
HSBC, which once billed itself as the world's local bank and built a global network of retail banking businesses, has in recent years been cutting those back to try to improve profits.
The deal will help RBC consolidate its leading position in one of the world's most concentrated banking markets, where the top six lenders control about 80% of outstanding loans. RBC's purchase price reflects a 30% premium to the value some analysts had attributed to HSBC's Canada business.
HSBC's disposals have accelerated amid pressure from its biggest shareholder Ping An Insurance Group, which has urged the bank to split off its Asian business to boost returns.
"We decided to sell following a thorough review of the business, which assessed its relative market position within the Canadian market and its strategic fit within the HSBC portfolio," Chief Executive Noel Quinn said.
HSBC said it may return some of the proceeds of the sale, expected to net the bank a $5.7 billion pre-tax gain, to shareholders via a one-off dividend or buyback from early 2024 onwards, after the deal has closed.
HSBC's shares were up 4% following the announcement, against a benchmark FTSE 100 index up 0.7%. RBC share fell as much as 1.6% in opening trade in Toronto.
Joe Dickerson, an analyst at Jefferies in London, said a big payout could go some way towards appeasing shareholders who were incensed by HSBC curtailing dividends in 2020, at the suggestion of British regulators.
"The transaction looks very sensible. In essence, the business is worth more to RBC than it is to HSBC, and the price reflects this," said Ian Gordon, banking analyst at Investec.
The deal also repairs what was an uncharacteristically weak capital position relative to HSBC's peers, Gordon said.
The purchase will enable RBC to take more market share in its home market, adding 130 branches and more than 780,000 retail and commercial customers. If successful, it will be the first big banking merger in a decade in Canada.
HSBC said in October it was considering the sale of the Canadian unit as it looks to beef up returns following pressure from Ping An.
Analysts have previous said further consolidation in Canada's banking market would attract scrutiny of the antitrust regulator.
Carl De Souza, Senior Vice President, Head of Canadian Banking, North American FIG at DBRS Morningstar, told Reuters the big question about the deal was "how the regulatory approval works out from a competition perspective."
"As part of the regulatory approval, they might have to divest in some businesses," he added.
HSBC is Canada's seventh biggest bank with assets of C$125 billion, and it earned C$490 million before tax as of June 30, based on its latest financial results. Analysts had valued HSBC's Canada business in the range of C$8 billion to C$10 billion.
HSBC hired JP Morgan to advise on the sale, Reuters previously reported.
($1 = 1.3444 Canadian dollars) (Reporting by Iain Withers and Lawrence White in London and Pushkala Aripaka in Bengaluru; Editing by Sinead Cruise, Jane Merriman and Mark Potter)