HSBC Canada offer cut as two big banks drop out

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Canada’s six largest banks have held preliminary meetings for possible bids in the auction from the Canadian branch of Britain-based HSBC Holdings Inc., but sources say two potential bidders have backed out.Sean Kilpatrick/The Canadian Press

The field of contenders to acquire HSBC Bank Canada is shrinking, with at least two major Canadian banks now out of the running.

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

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

The Globe and Mail does not identify 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. Canada’s six largest banks held preliminary meetings to test HSBC Canada, and the auction process moved quickly. The Globe reported that the first round of offers expired at the end of last week.

HSBC Canada would offer a buyer a significant increase in scale in the Canadian banking market. But a potential deal is fraught with challenges, some of which have to do with the size of the transaction. There are also potential political problems related to competition in an already concentrated banking market.

In the early stages of the auction, some analysts felt that CIBC and National Bank had some of the most compelling strategic reasons to buy HSBC Canada, even though each would have had to raise billions of dollars to reach the purchase price. As the fifth and sixth largest banks in the country, respectively, the two institutions could have seen the acquisition of HSBC Canada as a unique opportunity to bridge the gap between them and bigger rivals. And presumably, both banks would have presented fewer competition concerns than their more dominant competitors.

For National Bank, which bills itself as a “super regional” bank with a stronghold in Quebec, a deal would have significantly expanded its reach in western Canada. And last week, Scotia Capital Inc. analyst Meny Grauman wrote in a note to clients that CIBC had “a compelling strategic case for doing this deal, especially when it comes to increasing its share of the merchant market.”

But when CIBC Chief Executive Victor Dodig was asked about the HSBC sale at a meeting of hundreds of his bank’s top officials on Thursday, he hinted that preserving capital is important in the current climate of market uncertainty, and that the bank’s priority remains organic growth, according to a fifth source with direct knowledge of the meeting.

Analysts have singled out Royal Bank of Canada RY-T, the country’s largest bank, as an obvious favorite because it is the only Canadian lender that could have enough excess capital to buy HSBC Canada for cash, without raising additional funds. Toronto-Dominion Bank TD-T and Bank of Nova Scotia BNS-T could also be contenders, although both companies face obstacles on the way to a deal.

TD continues to work to close two major acquisitions in the United States. It is paying $13.4 billion to buy First Horizon Corp. and buying New York-based investment bank Cowen Inc. for $1.3 billion. But TD could sell part of its $16 billion stake in Charles Schwab Corp. SCHW-N to raise funds.

Scotiabank is in the midst of a CEO succession that surprised Bay Street by promoting a candidate from outside the banking industry. The change of leadership It won’t officially take place until early next year. But bank executives have expressed a desire to strengthen their presence in BC, where HSBC he already does a lot of business.

The fact that the largest of the big Canadian banks is probably still in the running for HSBC Canada as the smallest of the Big Six pulls out will only sharpen questions about how the government might respond to a merger.

If RBC or TD were to acquire HSBC Canada, the deal would increase their share of bank deposits in Canada to 24 or 21 percent, respectively. That would be higher than the market share created by a theoretical merger between National Bank and either Scotiabank, BMO or CIBC, the kind of deal that is widely viewed as a political failure because the federal banking regulator sees Big Six banks as systemically important to Canada.

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