HSBC sells its Canadian operations to Royal Bank of Canada in cash for $10.04 billion. In fact, this opens the door for future potential large dividend payments to shareholders.
Equally important, in an effort to increase earnings, HSBC has recently scaled back its retail banking operations, which it originally marketed as the world’s local bank and expanded into a global network.
However, under pressure from its largest shareholder Ping An Insurance Group, which has pressured HSBC to split off its Asian division to increase profits, the disposals have quickened.
Chief Executive Noel Quinn stated, “we chose to sell after a thorough examination of the business, which assessed its relative market position within the Canadian market and its strategic fit within the HSBC portfolio”.
After HSBC sells the Canadian operations, the bank said it may distribute a portion of the sale proceeds to shareholders in the form of a one-time dividend or share repurchase starting in early 2024. Moreover, the sale is anticipated to generate a pre-tax gain for the bank of $5.7 billion.
Furthermore, the bank cutting dividends in 2020 at the request of British authorities, according to Joe Dickerson, an analyst at Jefferies in London, could go some way toward placating shareholders.
Also, following the announcement, HSBC’s shares increased by 4%, outperforming the benchmark FTSE 100 index’s 0.7% gain.
“The transaction appears to be fairly rational. In essence, RBC values the company higher than HSBC does, and this is evident in the pricing”, according to Investec banking analyst Ian Gordon.
What is more, the transaction also strengthens what was an abnormally weak capital position in comparison to HSBC’s competitors.
With the addition of 130 new branches and more than 780,000 new retail and business clients, the acquisition will allow RBC to increase its market share in its home market. Besides, if completed, it will be Canada’s first significant financial merger in ten years.
Regarding a previous Reuters report, HSBC recruited JP Morgan to provide sale advice.
