On Tuesday, Royal Bank of Canada (TSX: RY) announced that it would purchase HSBC’s Canadian arm for $13.5 billion in an all-cash deal. HSBC currently has 140 branches and 4,200 full-time employees, with RBC’s CEO saying, “HSBC Canada offers the opportunity to add a complementary business and client base in the market we know best.”
Additionally, RBC states that HSBC Canada accounts for roughly 2% of all Canadian deposits and mortgages. They add that the purchase price represents a 9.4x multiple on HSBC Canada’s 2024 adjusted earnings. As a result, the company expects the acquisition to be approximately 6% EPS accretive and to have $740 million in realized annual pre-tax expense synergies.
RBC currently has 18 analysts covering the stock with an average 12-month price target of C$137.98. Out of the 18 analysts, one has a strong buy rating, ten analysts have buy ratings, four have hold ratings, and the last three analysts have sell ratings on the stock. The street-high price target sits at C$150 and represents an upside of about 14%.
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In Canaccord Genuity Capital Markets’ note on the news, they reiterated their hold rating and C$131 long-term price target. They say they anticipated RBC as the logical acquirer based on excess capital. But they note that the overall purchase price is slightly higher than their initial analysis, while the expected cost synergies are also higher.
They add that management stated that they “pivoted M&A strategy once the opportunity to add scale in Canada presented itself.” While Canaccord continues to expect RBC to look to do bolt-on acquisitions with a focus on Wealth Management in the U.S. and Europe.
Based on the purchase price, Canaccord estimates that 2024 fully synergized NIAT of <9x and P/B of 2.2x, while the big six banks currently trade at a P/E of 9.7x and a P/B of 1.5x.
Canaccord expects this deal to be “very financially accretive with potential upside toward revenue synergies.” RBC is also identifying cross-selling opportunities that will lead to revenue synergies overtime, as well as roughly $740 million in cost synergies with RBC targeting 25% of those cost savings to happen in year 1 and 95% by year 2.
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.
