HSBC agrees to sell its business in Canada to Royal Bank of Canada

29 Nov 2022

• Cash consideration of CA$13.5bn (US$10.1bn)
• HSBC Group’s estimated pre-tax gain of c.US$5.7bn
• HSBC Group’s CET1 ratio enhanced by additional c.130bps over and above existing capital plans
• HSBC Board to proactively consider appropriate amount of additional surplus capital created by this Transaction to be returned through a one-off dividend and/or share buybacks (in addition to any existing share buyback programme)

HSBC Holdings plc (the ‘Company’) announces its wholly owned subsidiary, HSBC Overseas Holdings (UK) Limited, has today entered into an agreement to sell its banking business in Canada (‘HSBC Canada’) to Royal Bank of Canada (‘RBC’), subject to regulatory and governmental approvals, (the ‘Transaction’).

RBC will acquire 100% of the issued common equity of HSBC Canada for a base cash consideration of CA$13.5bn (US$10.1bn¹). In addition, RBC will acquire all the preferred shares and the outstanding subordinated debt issued by HSBC Canada and held by the HSBC Group for approximately CA$1.1bn (US$0.8bn) and CA$1.0bn (US$0.7bn), respectively. The Transaction is expected to complete in late 2023.

Financial impacts of the Transaction on the HSBC Group (consolidated basis) are currently expected to be (based on financials as at 30 September 2022):

• An estimated pre-tax gain for the Company of c.US$5.7bn², inclusive of the recycling of c.US$0.6bn in foreign currency translation reserve losses. The estimated pre-tax profit on the sale will be recognised through a combination of the consolidation of HSBC Canada’s results into the Company’s financial statements (between the 30 June 2022 net asset reference date and until completion), and the remaining gain on sale recognised at completion. There would be no tax on the gain recognised at completion.
• As a consequence of the gain on sale and the disposal of the HSBC Canada RWAs, the HSBC Group’s CET1 ratio will be enhanced by an additional c.130 bps over and above our existing capital plans (based on HSBC Group RWAs of US$828bn and HSBC Canada RWAs on a PRA basis of US$31bn).

We continue to target a return on average tangible equity of at least 12% from 2023, excluding the gain on this Transaction. We remain committed to this target post completion of the sale.

Our dividend approach for 2023 and 2024 remains a targeted payout ratio of 50% excluding gains on disposal, and we reiterate our ongoing policy to distribute surplus capital, where appropriate. The Board will proactively consider opportunities for organic growth and investment, and the appropriate amount of additional surplus capital created as a consequence of this Transaction to be returned by way of a one-off dividend and/or share buybacks (in addition to any existing share buyback programme). The current timing of any distributions related to this Transaction is assumed to be from early 2024 onwards, following completion.

The sale agreement follows a strategic review of HSBC Canada, which is among Canada’s premier international banks with more than 130 branches and over 780,000 retail and commercial customers. The review considered HSBC Canada’s relatively low market share and the Group’s ability to invest in HSBC Canada’s expansion and growth in the context of opportunities in other markets, and concluded that the best course of action strategically for the HSBC Group and HSBC Canada was to sell the business. The transaction will unlock significant value for the HSBC Group.

Noel Quinn, CEO of HSBC Group, commented:

“HSBC Canada is a high performing and profitable bank, with strong leadership and exceptional people. I am grateful to the whole team for their hard work in supporting our clients over many years. We decided to sell following a thorough review of the business, which assessed its relative market position within the Canadian market and its strategic fit within the HSBC portfolio, and concluded that there was a material value upside from selling the business.

“I am pleased that we have reached an agreement with RBC. The deal makes strategic sense for both parties, and RBC will take the business to the next level. We look forward to working closely with RBC’s leadership team to ensure a smooth transition for our clients and colleagues. Our Group strategy is unchanged, and closing this transaction will free up additional capital to invest in growing our core businesses and to return to shareholders.”

Financial terms

Under the terms of the Share Purchase Agreement dated 29 November 2022, (the ‘Agreement’), RBC will acquire 100% of the issued common equity in HSBC Canada from HSBC Overseas Holdings (UK) Limited, a wholly owned subsidiary of HSBC Holdings plc, for a base cash consideration of CA$13.5bn (US$10.1bn³). In addition, RBC will acquire all the preferred shares and the outstanding subordinated debt issued by HSBC Canada and held by the HSBC Group at their closing par value (including accrued interest and dividend entitlements), which as at 30 June 2022 were approximately CA$1.1bn (US$0.8bn) and CA$1.0bn (US$0.7bn), respectively. The base cash consideration for the issued common equity is subject to a customary leakage adjustment. There will also be an adjustment for additional equity capital contributions made to HSBC Canada. As at 30 September 2022, the carrying value of HSBC Canada attributable to ordinary shareholders recognised in the Company’s consolidated financial statements was US$3.4bn and the total amount of the preferred shares and subordinated debt outstanding were US$0.8bn and US$0.7bn respectively. Consideration for the sale will be settled at completion in cash, currently anticipated to be in late 2023, subject to regulatory and governmental approvals and following completion of migration steps.

The Board of Directors of the Company believes the terms of the Transaction are fair and reasonable and in the interests of shareholders as a whole. The financial terms and aggregate contemplated consideration of the Transaction were arrived at after arm’s length negotiations and having taken into account the value of the component elements of HSBC Canada and the reasons for the sale set out below.

Financial impact of the Transaction

The sale would generate an estimated pre-tax gain for the Company of c.US$5.7bn, inclusive of the recycling of c.US$0.6bn in foreign currency translation reserve losses (as at 30 September 2022). The majority of the estimated pre-tax gain on sale is expected to be recognised at completion, currently anticipated to be in late 2023. There would be no tax on the gain recognised at completion.

Under the terms of the Agreement, the HSBC Group will retain control of HSBC Canada until completion and continue to make all the ordinary course of business decisions, subject to certain consent rights held by the Purchaser, therefore the results, assets and liabilities of HSBC Canada will continue to be reported in the Company’s consolidated financial statements between the 30 June 2022 net asset reference date and completion of the Transaction. The estimated pre-tax profit on the sale will be recognised through a combination of the consolidation of HSBC Canada’s results into the Company’s financial statements (between the net asset reference date and until completion), and the remaining gain on sale recognised at completion.