HSBC sold its US retail banking business last year. The group that once billed itself “the world’s local bank” has now launched a strategic review of its Canadian business, with a sale as one option. But saying goodbye to Canada would be more challenging than withdrawing from the US.
That statement may seem counterintuitive. Unlike the US unit, which was consistently lossmaking, the Canadian business is profitable. HSBC Bank Canada is the seventh-largest lender in the country with C$125bn ($91bn) of assets and C$74bn of loans. Focused on western Canada, it made $768mn in pre-tax profit last year.
But the Canadian banking market is a peculiar beast. It is dominated by a handful of domestic players that includes Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia (Scotiabank). A Big Six controls more than 80 per cent of total assets.
That explains why Canadian banking is so profitable. But this oligopoly would also make it hard for HSBC to find a buyer for its business.
Canada’s antitrust regulators would probably reject any attempt by one of the Big Six to buy the business to avoid further industry consolidation. Foreign banks will be wary of entering such a concentrated market.
Tellingly, Canadian banks are looking overseas for growth. Notably, they have been expanding in the US, with Bank of Montreal buying the US unit of BNP Paribas for $16.3bn last year.
Some think HSBC Canada could fetch between $8bn and $9bn. But that is optimistic. Rival Canadian banks trade on a 1.2 to 1.9 times price to book multiple and a forward earnings multiple of between 7.9 to 11.5 times. Both metrics would value HSBC’s Canadian business closer to between $4bn and $6bn.
HSBC should try for a sale even so. The Canadian business does not mesh perfectly into HSBC’s global network. Citi reckons a disposal could free up to $6.7bn of capital. It would also give HSBC some breathing room in its tussle with its largest shareholder Ping An. The Chinese insurer wants the bank to split its Asian and western operations.
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