HSBC Holdings PLC could struggle to make a profit from the sale of its Canadian business amid growing concerns about the outlook for the global economy and financial markets.
The U.K.-based bank's board has instructed investment bankers at JP Morgan to sound out prospective buyers for the business, Sky News reported Oct. 4. The business, established in 1981, is valued between $7 billion and $9 billion, according to media reports.
"The timing is questionable because it's hard to sell assets in the current climate," Fahed Kunwar, bank analyst at equity research firm Redburn, said in an interview.
Any buyer would be committing to a significant outlay at a time of heightened economic uncertainty, as a surge in inflation in many major economies over the last year has forced central banks to hike interest rates. This, in turn, has tightened financial market conditions and squeezed growth prospects. The likelihood of the world's largest economies falling into recession in the next year has increased significantly as a result, according to estimates by the International Monetary Fund.
Frédéric Oudéa, CEO of French banking giant Société Générale, dismissed the prospect of major M&A activity in the banking sector during the current "crisis" in an interview at S&P Global Ratings' European Financial Institutions Conference Oct. 6. "It's not necessarily [the] best moment to move on something like this and all managers, all CEOs, are focusing on dealing with the current environment," said Oudéa.
HSBC Bank Canada is the seventh-largest lender in the country, with total assets of more than C$80 billion, S&P Global Market Intelligence data shows. This is slightly more than 3% of the entire group's total assets as of the end of June, the data shows. The Canadian business also contributed around 3% to the group's net income in the first half of 2022.
HSBC Canada generates the bulk of its revenue from commercial, wealth and personal banking services. The Vancouver-headquartered unit has 120 depository branches across the country.
The bank has achieved a return on average equity of 10% or above for four of the last five years, with pandemic-hit 2020 the exception. It more than doubled net profit to C$717 million in 2021 from C$308 million the year prior, while net income rose to C$1.23 billion from C$1.09 billion over the same period.
Pivot to Asia
HSBC told Sky News that it regularly reviewed its businesses across all its markets. "We are currently reviewing our strategic options with respect to our wholly owned subsidiary in Canada. Amongst the options being explored is a potential sale of HSBC Group's 100% equity stake in HSBC Bank Canada. HSBC Bank Canada is a very strong business and Canada's leading international bank."
No decisions have yet been made, according to the Oct. 4 report.
HSBC's move to explore a sale of its Canadian business follows its exit from several other markets in recent years. It sold its U.S. retail banking operation in 2021. It also exited France last year and is in the process of leaving Greece. HSBC's sale of its French retail unit to private equity firm Cerberus for €1 saw the bank take a $3 billion loss on the loss-making business.
The London-based bank's retreat from Western markets comes as HSBC's largest shareholder, Ping An Insurance (Group) Co. of China Ltd., has put pressure on the bank to split its Asian business from the rest of the group in order to unlock its growth potential and improve profitability.
"There are higher returns there and it's a more focused business," said Kunwar. "The more HSBC can simplify the group towards Asia-Pacific, given the pressure from Ping An, the better for them."
A sale of its Canadian business would also free up capital for HSBC to either boost its share price through a share buyback or bolster its capitalization, Kunwar added. HSBC stock is currently trading at about 17.6% below the bank's tangible book value per share of $6.40 at the end of June, according to Market Intelligence data.
"Buybacks are the best way out of that kind of a predicament," said Kunwar.
HSBC's fully-loaded common equity Tier 1 capital ratio — a measure of a bank's ability to withstand financial stress — had fallen below its target range to 13.55% as of the end of June. The bank's fully-loaded CET1 target range is 14% to 14.5%.
