Focus on pending acquisition of HSBC Canada

The focus for this Big 6 Canadian bank will be on its pending acquisition of HSBC Canada, and of course, widening its net interest margins (NIM) in the wake of rising interest rates.


Big 6 bank focus is on acquisition of HSBC Canada

The focus for Royal Bank of Canada (TSX—RY; NYSE—RY) will be on its pending acquisition of HSBC Canada and widening its net interest margins (NIM), says Desjardins Capital Markets analyst Doug Young. He likes the outlook on both fronts.

Plus with the quarterly dividend increased three per cent to $1.32, he adjusts his estimates, increases his target price to $145 per share (from $140) and maintains a “buy” recommendation.

Royal Bank also announced a two per cent discount on its DRIP (dividend reinvestment plan) to help maintain a strong ratio following the acquisition of HSBC Canada closing for $13.5 billion cash (expected to close in late 2023).

HSBC Canada has about 4,200 full-time employees, 130 branches, more than 770,000 and 12,000 retail and commercial clients, respectively, with a loan book that is roughly evenly split between commercial and retail.

The revenue synergy opportunity (not included in accretion estimates) seems interesting, says Mr. Young. Only eight per cent of HSBC Canada clients have a full spectrum of products (versus 19 per cent for Royal Bank and 11 per cent for the peer average), so there is a clear opportunity to cross-sell. Potential referral agreements for new clients coming to Canada could also make the onboarding process more seamless.

Integration costs of the HSBC Canada takeover will be about $1 billion (25 per cent expected to be incurred by the close in late 2023, with the remaining 75 per cent by the end of the first year post closing). It will take a net markdown related to credit, interest rate loans and interest rate liabilities, which is expected to accrete back into earnings over two-to-three years, says the analyst. HSBC Canada’s earnings from June 30, 2022 to the close will accrue to Royal Bank (expected to be about $1 billion).

For the fourth quarter of fiscal 2022 (period ended Oct. 31), the all-bank NIM excluding trading was in line with our expectations. There was a lot of detail provided on NIMs to Mr. Young. In a nutshell, he says management anticipates further NIM expansion through fiscal 2023, but as central bank rates move closer to peaking, it has acted to protect NIMs (via hedging).

Royal Bank of Canada operates as a diversified financial services company. The bank was founded in 1864 and is headquartered in Toronto.

This is an edited version of an article that was originally published for subscribers in the January 2, 2023, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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