The Royal Bank of Canada (RBC) is facing mounting pressure from the House of Commons finance committee and Conservative Leader Pierre Poilievre to halt its $13.5 billion acquisition of HSBC Bank Canada. The deal, which has already received approval from the Competition Bureau, is currently under review by the Office of the Superintendent of Financial Institutions (OSFI) and the Department of Finance.
The finance committee and Poilievre have expressed concerns about potential harm to competition in the financial services sector, fearing that reduced competition could lead to higher banking fees for Canadians. This comes in the wake of HSBC Holdings (NYSE:HSBC) PLC's announcement in October 2022 to sell its Canadian subsidiary as part of a global divestment strategy, which saw RBC emerge as the winning bidder.
As part of their opposition, all six opposition party members on the finance committee endorsed a motion recommending that Finance Minister Chrystia Freeland reject the merger. The six Liberal members refrained from voting on this motion. The motion highlighted a decline in Canada's competitive intensity and a dearth of financial institutions in the Canadian banking sector.
Conservative Leader Pierre Poilievre warned against the merger, arguing it would decrease banking competition during a time when homeowners are grappling with high borrowing costs. He insisted that HSBC should not withdraw from the market due to its competitive mortgage rates.
In response to these concerns, RBC spokesperson Andrew McGrath said that the deal would provide stability and continuity for HSBC’s 700,000 Canadian clients while preserving financial sector jobs domestically. RBC also argues that the acquisition will provide HSBC's Canadian customers with continuity, stability, innovative banking solutions, and advanced digital capabilities.
The proposed takeover would significantly enhance RBC's dominance by adding tens of billions of dollars in loans and deposits. The Competition Bureau initiated a public consultation on the potential competitive impact of the deal, receiving over 1,500 submissions from Canadians. A separate report by the bureau indicated a decline in competition over the past two decades as industries have become more concentrated and less dynamic.
The federal Finance Department is also conducting its own public consultation on the deal, which requires approval from Canada’s banking regulator, the Office of the Superintendent of Financial Institutions. The deal is expected to close in early 2024.
InvestingPro Insights
In light of the ongoing discussion surrounding RBC's acquisition of HSBC Bank Canada, it's important to consider key financial indicators and insights from InvestingPro.
For RBC, InvestingPro Tips highlight a history of consistent dividend payments, having maintained these for 51 consecutive years and raising them for 13 consecutive years. This suggests a robust financial standing, which might be a factor in their ability to undertake such a large acquisition. However, analysts have noted that the bank's low earnings quality and quick cash burn could potentially impact future dividend payouts.
On the other hand, HSBC has also seen accelerating revenue growth and consistent increases in earnings per share, according to InvestingPro Tips. This could make it an attractive acquisition for RBC, despite the political opposition. The bank has also raised its dividend for 3 consecutive years, further indicating a strong financial position.
InvestingPro Data reveals that RBC has a market cap of 116.18B USD and a P/E ratio of 10.99 as of Q3 2023, while HSBC has a market cap of 136170.0M USD and a P/E ratio of 5.22. RBC's revenue growth was 9.45% in the last twelve months as of Q3 2023, whereas HSBC saw a much higher growth of 47.98%.
These insights, among the 100+ additional tips and data points available on InvestingPro, can provide a deeper understanding of the financial dynamics at play in this highly scrutinized merger.
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