The Free Market meets lowering costs for Consumers
News Report: Poilievre calls on Freeland to reject RBC takeover of HSBC Bank Canada
When virtue-signaling runs up against “making life more affordable” in a tougher economic environment, it shouldn’t surprise anyone that the Conservative Party of Canada continues to poll substantially higher than the governing Liberals. Prime Minister Justin Trudeau has said many a time that he analyzes every policy decision through a “gender lens,” which wasn’t a useful vista when the Competition Bureau approved RBC’s acquisition of HSBC Canada last month.
For Conservative Leader Pierre Poilievre, the decision tree around the RBC-HSBC Canada proposal was likely easier than free-marketeers might think:
Does HSBC have the right to sell its Canadian division? If a strategic sale doesn’t happen, is the business sufficiently viable to i) stay the course, or ii) go public via an IPO on the stock market, giving HSBC Canada’s parent company an alternate path to exit the investment, over time?
What will the specific proposed transaction mean for Canadian Consumers?
If the loss of competition in the mortgage and business lending market might make life less affordable for Canadians, why approve it?
If the “safety and soundness” of Canada’s banking system won’t be impacted either way, return to #3.
See how straightforward that was? (And the IPO idea comes at no-charge.)
During his interview with The Globe and Mail late last week, Mr. Poilievre raised an issue that isn’t going away in the event that Finance Minister Freeland allows the RBC-HSBC deal to proceed:
“If the biggest bank in Canada simply buys up a growing smaller player, then there’s no hope of ever having more competition in Canadian banking.”
I don’t have any inside info on the list of firms in the HSBC Bank Canada dataroom, but this type of deal is more complicated than an in-market merger in most other sectors of the economy, given the plethora of unique considerations:
What will this mean for our regulatory capital ratios?
Will our cost of funding go up or down, post-acquisition?
Does growing in Canada fit our overall strategy?
Do we have the management bandwidth to take on the additional client base?
What products will we cross-sell to these new clients in an effort to grow earnings faster than we would otherwise?
Can our Information Technology, Compliance and Anti-Money Laundering teams handle the integration challenges?
Will the added bulk mean that The Office of the Superintendent of Financial Institutions (OSFI) and FINTRAC will expect even more from us, requiring additional, expensive, hard-to-hire headcount in non-client facing divisions of our institution?
Will there be any true cost synergies?
In theory, every existing decent-sized bank in Canada would have been happy to add 800,000 new customers — assuming you had no material client overlap. Then there are the two obvious LifeCos, SunLife and Manulife: they already poke away at the retail banking/weath management space. That gives us eight excellent would-be bidders, before considering Power Corp. (GWL & Wealthsimple), E-L Financial, Fairfax, Canadian Western Bank, Laurentian Bank, Desjardins (backed by CDPQ? see prior post “The political appeal of "Premier Smith’s plan to withdraw from CPP" -- whether we like it or not” Sept. 28-23), Canadian Tire Bank, Rogers Bank, Apple, Google, as well as U.S. banks, such as Fifth Third, PNC, JP Morgan, and so forth.
It’s equally easy to figure out who wasn’t a viable bidder: i) any institution currently not in good stead with OFSI, or ii) anyone who’d be in the doghouse with OSFI, post-acquisition. Given the huge $13.5 billion price tag, every OSFI-regulated institution interested in making a serious push would have wanted to know how any proposed deal would be seen by their existing regulator. There are plenty of challenges on that front, including pro-forma capital ratios, risk management capabilities, the robustness of the existing AML platform / cyber defences, management depth (as-in, are you currently digesting the acquisition of The Bank of The West, for example?), and so forth.
Once you work through the decision tree around your institution’s growth strategy, the regulatory implications of this size of an acquisition, not to mention closing risk, the deal still comes down to price. Who can pay the most? Which, in capital-controlled sectors such as banking and insurance, is as simple as i) your institution’s existing valuation, ii) synergy potential.
For all the complications at play, you can see how RBC became the leading bidder among the domestic banks. TD Bank had just gone through a protracted M&A approval process in the USA, with no end of regulatory pain. BMO had just done a huge deal of it’s own. BNS is in turnaround mode under new leadership (which might have made the HSBC deal more attractive from a strategy standpoint, actually), CIBC’s trading multiple is well below that of RBC, and, despite having a great valuation itself, National Bank’s synergy opportunities (aka ability-to-pay) would have paled in comparison to RBC’s.
Whatever happens next, Mr. Poilievre’s observation about a lack of “hope of ever having more competition in Canadian banking” can’t be ignored. That starts with OSFI, which could de a far better job of encouraging competition in Canada: by actually encouraging the formation of new de novo banks.
It also raises the issue of the future of the Business Development Bank of Canada (BDC). Over the past decade, it has easily tripled in size, all via organic growth. If it were a privatized publicly-traded entity, just like the once Crown-owned CN Rail, could Ottawa get some of it’s capital back at a premium…putting a small dint in Canada’s national debt? Would the absence of a bureaucratic master allow BDC to improve its commercial product offering to the SME sector? If a privately-held BDC then got into the mortgage business, would that be good for consumers and the competitive landscape? If not, why not? It would certainly mean that Ottawa was no longer competing with the private sector, which appeals to the free market crowd (see representative prior post “BDC takes off the competitive gloves with cheap loan rates” Jan. 30-14).
There’s also CMHC, a Crown Agency who’s mandate has been tweaked on numerous occasions over the decades, presenting another opportunity to improve competition in the domestic mortgage market; regardless of what happens on the RBC/HSBC front. A future Poilievre government is going to have lots of opportunity to tackle the bigger issue at play here, in the event the Conservatives prevail in 2025.
In the meantime, an Initial Public Offering of HSBC Bank Canada gets Mr. Poilievre what he wants, balancing a Conservative’s natural desire for the free market to prevail with the obvious political imperative of doing all that you can to make life more affordable for Canadians. With the added benefit that a key Canadian sector doesn’t look like “Hotel California” to foreign investors or conglomerates.
MRM
(this post, like all blogs, is an Opinion Piece)
(photo credit: Breton Onion Seller, London, 1950, by Irving Penn)
You are correct - "“If the biggest bank in Canada simply buys up a growing smaller player, then there’s no hope of ever having more competition in Canadian banking".