Reference no: EM133346120

Case Study: Acquisition to position RBC as the bank of choice for globally connected clients

Addition of attractive client base and expanded international banking capabilities
Strong cultural fit and aligned approach to disciplined risk management
Strategic deployment of excess capital with attractive financial returns
TORONTO, Nov. 29, 2022 /CNW/ - Royal Bank of Canada (TSX: RY) (NYSE: RY) today announced it has entered into an agreement to acquire HSBC Bank Canada ("HSBC Canada"), a premier Canadian personal and commercial bank focused on globally connected clients.

Under the terms of the agreement, RBC will acquire 100% of the common shares of HSBC Canada for an all-cash purchase price of $13.5 billion. All of HSBC Canada's earnings from June 30, 2022 through close will accrue to RBC1.

"HSBC Canada offers the opportunity to add a complementary business and client base in the market we know best and where we can deliver strong returns and client value given our financial strength and award-winning service," said Dave McKay, President & CEO, RBC. "This also positions us as the bank of choice for commercial clients with international needs, newcomers to Canada and affluent clients who need global banking and wealth management capabilities. It will help us better serve global clients looking to invest and grow in Canada."

"This acquisition builds on our core domestic retail business and expands our international product capabilities," said Neil McLaughlin, Group Head, Personal & Commercial Banking, RBC. "We look forward to welcoming HSBC Canada's talented employees after the transaction closes and supporting them as they continue to serve their clients. With strong cultural and risk alignment and a shared focus on client service, we can build together on HSBC Canada's leading international products."

HSBC Canada has $134 billion in assets as at September 30, 2022, approximately 130 branches and 4,200 full-time equivalent employees. Its commercial bank brings strong capabilities focused on international business clients, including in liquidity management, trade finance, global cash management and sustainable finance. HSBC Canada's wealth and personal banking business serves an affluent client base, with particular strength in meeting the needs of international clients with connections to Canada. Its strong balance sheet includes a well-diversified loan book and an attractive deposit base.

Clients to benefit from industry-leading advice, convenience, digital capabilities and value propositions
Combining HSBC Canada's strength in international products with RBC's breadth of capabilities will provide a best-in-class set of solutions to help clients meet their financial goals, build their wealth and grow their businesses.
RBC remains committed to ensuring clients get the highest value, competitive rates and best service.
HSBC Canada clients will have access to the largest network of branches and ATMs in Canada, giving them exceptional convenience in their everyday banking.
RBC consistently wins awards for customer service and satisfaction, and offers an industry-leading digital banking experience and rewards program.
RBC is a globally-recognized Employer of Choice
RBC has consistently high employee engagement and ranks among the best workplaces in Canada2.
RBC employs over 92,000 full-time and part-time employees globally, including almost 65,000 full-time equivalent in Canada.
RBC is committed to offering an exceptional work experience and competitive rewards package that inspires employees to achieve both their life and career goals with RBC, including a full suite of banking, retirement, savings and benefits programs alongside other resources like flexible work options, learning and development opportunities and well-being.
Diversity & inclusion is core to RBC's Purpose; RBC has repeatedly been recognized as one of Canada's Best Diversity Employers3 and plays an active leadership role in accelerating a more inclusive future.
RBC and HSBC Canada share a strong commitment to communities
RBC plays a leadership role in community investment, with a total contribution of more than $140 million globally in fiscal 2021. RBC donates 1% of its Canadian net income before tax each year, helping our communities grow with us.
RBC has a strong focus on youth, climate, financial wellness and diversity & inclusion, with the goal of building vibrant and socially inclusive communities; this includes an investment of $500 million dollars over 10 years4 in helping young Canadians prepare for the future of work.
RBC and HSBC Canada share a focus on sustainability. RBC is committed to taking action in helping our clients transition to net zero. RBC has committed to providing $500 billion in sustainable finance by 20255.
Acquisition highlights
The acquisition will enhance RBC's competitiveness on the global stage without compromising Canadians' access to a competitive, diverse market here at home.

The financial sector is highly competitive in Canada, with 50 banks and hundreds of credit unions and fintechs competing to serve Canadians. HSBC Canada accounts for around 2% of Canadian deposits and mortgages.

Under the terms of the agreement, RBC will acquire 100% of the common shares of HSBC Canada for an all-cash purchase price of $13.5 billion. All of HSBC Canada's earnings from June 30, 2022 through close will accrue to RBC6. The purchase price represents a 9.4x multiple of HSBC Canada's estimated 2024 adjusted earnings of $1.4 billion assuming fully realized expense synergies. On this basis, the acquisition is expected to be approximately 6% EPS accretive relative to 2024 consensus estimates for RBC7. This acquisition is expected to have an Internal Rate of Return8 of 14% and a marginal return on tangible common equity9 of 27%. RBC expects its CET1 ratio10 to exceed 11.5% upon close11.

RBC expects to achieve approximately $740 million, or 55%, in fully realized annual pre-tax expense synergies based on HSBC Canada's estimated 2024 non-interest expense base, and incur total acquisition and integration costs of approximately $1 billion. RBC will purchase all of the existing preferred shares and subordinated debt of HSBC Canada held directly or indirectly by HSBC Holdings plc at par value.

Closing is expected by late 2023 subject to customary closing conditions including regulatory approvals, obtained in the ordinary course. All amounts are in Canadian dollars.

Questions:

1. From the case above indicate whether RBC is involved in an acquisition or a merger? Explain based on what was discussed in class.

2. Identify four reasons why RBC will want this deal to go through?

3. Identify two reason why this deal will be a bad idea for RBC.

4. Explain why RBC will buy HSBC Canada at $13.5 billion when its assets are valued at $134 billion.