By Lawrence White, Iain Withers and Divya Rajagopal
LONDON/TORONTO/NEW YORK (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.
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 banking assets. RBC's purchase price reflects a 30% premium to the value some analysts had attributed to HSBC's Canada business. Canadian regulators said they will review the deal.
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.
HSBC's exit from Canada marks the first major banking deal in Canada since ING sold its local operations to Bank of Nova Scotia for C$3.1 billion in 2012.
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 closed up 4.4%, against a benchmark FTSE 100 index up 0.5%. RBC shares recovered after early falls to trade down 0.2% by late afternoon, while benchmark Canada share index was up 0.3%.
RBC, which expects the deal to add 6% to its 2024 earnings per share, will fund the acquisition using internal resources. Its core capital ratio will drop to 11.5% upon close closure from 13.1% currently.
The deal will boost RBC's assets by C$134 billion to C$2 trillion, and add about 130 branches to its existing network of 1,200 branches.
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, Head of Canadian Banking 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.
RBC CEO Dave McKay told reporters the bank does not expect competition concerns, when asked if it would be open to divesting assets.
"We not aware of any areas where the bureau is likely to have concerns," McKay said.
RBC and HSBC's combined assets would account for 25% of total Canadian banking assets, according to Morningstar.
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, Saeed Azhar in New York and Kanishka Singh in Washington; Editing by Sinead Cruise, Jane Merriman, Mark Potter and Nick Zieminski)