BMO: HSBC Canada Acquisition By Big 6 Would Be “Accretive To Safety And Soundness Of The Banking System In Canada.”

Earlier this month, it was reported that HSBC (NYSE: HSBC) was exploring the sale of its Canadian arm. The bank’s Canadian arm is worth roughly $10 billion and has over 130 branches with 5,348 employees. According to the company’s filings, their Canadian operations produced US$758 million in pre-tax profit.

A few analysts have raised their 12-month price target on HSBC in light of the news; the company now boasts a long-term price target of £645.67, about a 42% upside to the current stock price. Out of the 21 analysts covering the stock, four have strong buy ratings, another four have buy ratings, ten analysts have hold ratings, and the last three analysts have sell ratings on the stock. The street-high price target sits at £792, and represents an upside of about 75%.

BMO published a note earlier this month providing analysis on which bank would most likely look to purchase the Canadian arm of HSBC for the assumed sale price of US$10 billion. They say that their analysis leads them to believe that the deal would be the most accretive for the Royal Bank of Canada (TSX: RY) and the National Bank of Canada (TSX: NA), though they believe it is possible for all of the big five banks.

First, BMO provides some additional background into HSBC Canada; they say that the arm currently has about $125 billion in assets and about $75 billion in total loans. In their assumptions, they put the total purchase price between $7.5 and $10 billion, with the lower end representing a 10% deposit premium and the high end being 2x book value of the Canadian arm.

One of the more exciting points BMO provides in the note is that there is a large black box regarding how the Canadian regulators would handle one of the top 6 largest banks acquiring the seventh largest bank. They say that this transaction will have more significant implications for Canadian bank investors and ask, “does that open the door for the fourth and fifth largest banks to also be approved to merge?”

BMO goes on to say, “A successful combination of the sixth and seventh largest banks would not alter the size rank of the “Big 6,” but would be accretive to safety and soundness of the banking system in Canada, in our view.”

Below you can see BMO’s summary of earnings per share accretion by bank. Assumptions include that the acquirer pays between the $7.5 and $10 billion price tag, the acquirer would maintain a minimum 11% CET1 ratio and there is a 10% attrition on the assets during the first year.

Their analysis suggests that Royal Bank would see the highest earnings per share accretion, going from $11.60 to $12.35 in 2023. Though BMO notes that Royal Bank does not need to make this acquisition, “it would be additive especially if economic growth is a headwind in the foreseeable future.”

They add that the National Bank of Canada would be the best strategic fit as, “it is a ‘once in a lifetime’ opportunity to truly become a national bank in Canada.” With HSBC Canada being about one-third of the company’s total assets and a $10 billion price tag being roughly one-third of the company’s current market capitalization, they would expect National Bank to look to issue equity to bridge the shortfall.

For CIBC, BMO suggests that the bank could be looked at as stretching itself too thin as it currently is trying to increase its presence in the U.S. With CIBC also needing to issue equity to close the shortfall in financing to acquire HSBC Canada, they do not believe CIBC will look to pursue this acquisition.

Lastly is TD, which BMO largely writes off as a potential acquirer of the assets, primarily due to its already prominent role in Canada. BMO also points to TD’s pending acquisitions in the U.S, saying that a third acquisition might “stretch management bandwidth and add to operational risk,” and they believe it is better for TD to deliver on the two acquisitions than start the third one.

Information for this briefing was found via Edgar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

Leave a Reply