HSBC's Deal To Sell Brazil Business Sanctioned By Regulators

HSBC Holdings Plc (LON:HSBA)’s (NYSE:HSBC) agreement with Banco Bradesco S.A. (NYSE:BBD) to sell its Brazil business was unanimously approved by the Brazilian Administrative Council for Economic Defense (Brazil’s Competition Agency). Notably, the approval is based on the condition that Bradesco, the country’s 4th largest bank, will refrain from entering into any further acquisition deals for at least next 30 months.

The official publication of the transaction approval is likely to be on or before Jun 14, 2016 and the two parties plan to complete the transaction early in July. Nonetheless, HSBC will be maintaining its presence in Brazil to serve large corporate clients with respect to their international needs.

Deal Details

In order to pursue its goal to optimize the global network and reduce complexity, in Aug, 2015, HSBC had disclosed the deal to divest its entire business in Brazil to Bradesco, for an all cash consideration of $5.2 billion. The purchase price was subject to amendment to reflect the changes in the net asset values for the business from Dec 31, 2014 until completion.

HSBC Brazil is the 6th largest bank in Brazil, with total assets of $45 billion and total equity of $3 billion, as on Mar 31, 2016. The bank carries out several business activities in Brazil including Retail Banking, Commercial Banking, Global Banking and Markets and Private Banking. The company’s Brazil operations comprise of HSBC Bank Brasil S.A.-Banco Multiplo and HSBC Servicos e Participacoes Ltd.

Financial Impact of the Deal

The sale of the Brazil business is expected to reduce HSBC’s risk weighted assets by around $37 billion and increase the common equity tier 1 ratio by 65 basis points.

For Bradesco, the transaction will help improve its market share in Brazil with 16% increase in assets and an addition of five million clients to its customer base.

Accounting Treatment

Based on the net assets of HSBC Brazil, which includes allocated goodwill of $4.3 billion as on Mar 31, 2016, the transaction will result in a gain on sale (net of tax and transaction costs) of $0.6 billion, before accounting for foreign exchange losses, earlier recognized in other comprehensive income.

After accounting for the foreign exchange losses, there would be a loss on sale of $1.7 billion. The allocated goodwill and the foreign exchanges are not expected to have any impact on HSBC’s regulatory capital.

Road Ahead

The completion of the divestiture will be a step in right direction as HSBC has been striving hard to maintain its profitability through restructuring and streamlining initiatives. These efforts are likely to help the company to tide over the challenging operating backdrop.

Currently, HSBC holds a Zacks Rank of #4 (Sell). Foreign banks sporting Zacks Rank #1 (Strong Buy) include Bank of Montreal (TO:BMO) and Royal Bank of Canada (NYSE:RY) .


BANCO BRADESCO (BBD): Free Stock Analysis Report

BANK MONTREAL (BMO): Free Stock Analysis Report

ROYAL BANK CDA (RY): Free Stock Analysis Report

HSBC HOLDINGS (HSBC): Free Stock Analysis Report

Original post