May 29, 2023

Bidding for HSBC Canada narrows as two major banks fall

All six of Canada’s biggest banks held preliminary meetings about possible bids for the auction of the Canadian arm of Britain’s HSBC Holdings Inc., but two potential bidders have backed out, sources said.Sean Kilpatrick / The Canadian Press

The pool of potential buyers for HSBC Bank Canada is narrowing, with at least two major Canadian banks now out.

Canada’s central bank NA-T is no longer in the bidding for the Canadian arm of Britain’s HSBC Holdings Inc., according to two sources familiar with the process. Canadian Imperial Bank of Commerce CM-T is also out of the process, said a third source with direct knowledge of the bank’s position.

Bank of Montreal BMO-T is among the banks still chasing HSBC Canada — a valuable asset that could fetch more than $10 billion if sold — according to a fourth source with knowledge of BMO’s involvement in the auction.

The Globe and Mail is not identifying the sources because they are not authorized to discuss the confidential bidding process.

Spokesmen for HSBC, BMO, National Bank and CIBC declined to comment.

HSBC confirmed in early October that it was considering selling its Canadian unit, a profitable business with strong roots in commercial banking and a large presence in British Columbia and Ontario. All six of Canada’s biggest banks held preliminary meetings to kick the tires on HSBC Canada, and the auction process has moved quickly. The Globe has reported that the first round of bids were due late last week.

HSBC Canada would offer the buyer significant scope in the Canadian banking market. But a potential deal is fraught with challenges, some related to the size of the deal. The competition also involves potential political problems in the already concentrated banking market.

In the early stages of the auction, some analysts considered CIBC and National Bank to have the most compelling strategic reasons to buy HSBC Canada, even though each would have had to raise billions of dollars to cover the purchase price. As the fifth and sixth largest banks in the country, the two institutions may have seen the acquisition of HSBC Canada as a unique opportunity to narrow the gaps between themselves and larger competitors. And both banks would likely have presented fewer competition concerns than their more dominant rivals.

For National Bank, considered a “super-regional” bank with a base in Quebec, the deal would have significantly expanded its reach in western Canada. And last week, Meny Grauman, an analyst at Scotia Capital Inc., wrote in a note to clients that CIBC had “a compelling strategic rationale for entering into this deal, particularly as it relates to growing its commercial market share.”

But when CIBC chief executive Victor Dodig was asked about the HSBC sale at a meeting of hundreds of his bank’s executives on Thursday, he hinted that capital preservation is important in the current climate of market uncertainty and that the bank’s priority remains. organic growth, says a fifth source with direct knowledge of the meeting.

Analysts have pegged Royal Bank of Canada RY-T, the country’s largest bank, as the obvious front-runner because it is the only Canadian lender that may have enough extra capital to buy HSBC Canada in cash without additional funding. Toronto-Dominion Bank TD-T and Bank of Nova Scotia BNS-T could also be contenders, although both companies face hurdles on the way to a deal.

TD is still working on two major acquisitions in the US. It will pay US$13.4 billion to buy First Horizon Corp. and buy New York-based investment bank Cowen Inc. for US$1.3 billion. But TD could sell some of its $16 billion stake in Charles Schwab Corp. SCHW-N to raise funds.

Scotiabank is in the midst of a CEO succession that stunned Bay Street by bringing in a candidate from outside the banking industry. A change in leadership it will not be officially organized until the beginning of next year. But the bank’s executives have expressed a desire to strengthen its presence in B.C., where HSBC is already doing a lot of business.

That the largest of Canada’s big banks is likely to remain in competition for HSBC Canada, the smallest of the Big Six, only sharpens questions about how the government might respond to the merger.

If RBC or TD were to buy HSBC Canada, the deal would increase their share of Canadian bank deposits to 24 percent or 21 percent, respectively. That would be more than the market share of a theoretical merger between National Bank and any of Scotiabank, BMO or CIBC — the type of deal widely considered a political non-starter because the federal banking regulator holds the big six. systemically important to Canada.

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