RBC’s acquisition of HSBC may reduce mortgage competition
HSBC Canada has only a small share of the country’s mortgage market, but in recent years has built a reputation as a lousy competitor, advertising lower rates than the big banks and often forcing them to match or at least cut back on their offerings.
That could all go away if RBC’s $13.5 billion deal to acquire the Canadian division of global bank HSBC is approved by the federal government, and experts say there’s little in Canada’s competition law that stops the transaction could justify.
Federal authorities, including the Competition Bureau and banking regulator, are reviewing the merger, announced in November, and the Treasury Secretary will make the final decision on the deal that would see RBC buy Canada’s seventh-largest lender.
The agency completed a call for public input on the merger in June, while the finance department just extended a deadline for its own consultation to July 21. And against the background of those ongoing assessments came news this week that Laurentian Bank is conducting a strategic review that could lead to the sale and even more consolidation in the industry.
Ottawa blocked a few mergers involving four of the country’s largest banks in the late 1990s, but with a smaller player like HSBC now in the spotlight, Keldon Bester said he is “not optimistic” that the competition agency or the minister will approve the merger. will stop despite how it could change the competitive dynamics in the mortgage market.
“It is very unlikely that the agency will be able to block the transaction because of how our law rejects the role of small, aggressive competitors,” said Bester, co-founder of the Canadian Anti-Monopoly Project.
The Competition Bureau’s merger review guidelines state that the watchdog will generally not challenge a transaction if the merged company holds less than 35 percent of the market.
RBC is Canada’s largest bank, but with five other major players, it doesn’t hold an overwhelming share of the market. A January Barclays report pegged RBC’s share of total domestic deposits at 22 percent and its share of domestic loans at 21 percent.
Combine that with HSBC’s share of about two to three percent, depending on the type of banking product, and you’re still nowhere near that 35 percent threshold.
But mortgage strategist Rob McLister argues that HSBC has excessive leverage in the market and urged the agency to take that into account in a submission he submitted as part of the consultation.
“HSBC has been like a godsend to mortgage consumers since it began its day-to-day low-price model in 2016,” said McLister. “Its small market share really belies its impact on the market overall… the real value to the market is that it brings better deals to non-HSBC customers.”
“If HSBC didn’t exist, people wouldn’t have so much ammunition to use in rate negotiations,” he said, adding that the other lenders, who still want to be seen as competitive, also often lower their own rates to something that is in the market. comes close. to the HSBC rates.
Jennifer Quaid, a competition law professor in the University of Ottawa’s civil law section, said the firm will analyze the merged company by both geography and product type, and that combining the two banks’ stocks in some places may can be problematic, but not others.
HSBC Canada has more than 130 offices and approximately 800,000 customers, and its operations are heavily concentrated in metropolitan areas where it often serves customers with international roots, particularly Vancouver and the Lower Mainland in British Columbia and the Greater Toronto Area.
“If RBC is able to work out some kind of terms, or things they’ll do differently for those markets, then the deal will probably go through,” Quaid said.
When RBC announced the deal in late November, CEO Dave McKay suggested that adding his bank’s market share to HSBC’s in several markets across the country would not hinder competition.
“We are not aware of any areas that the agency could be concerned about and we are not aware of any reason why antitrust approvals will not be received,” he said on a conference call.
“In the grand scheme of things, this is still a relatively small bank with a market share of two percent or less,” he continued. “And therefore, as we go through and see if it’s by product or by geography, we don’t have any reason to believe at this point… that there should be any concerns.”
A coalition of climate-focused nonprofits has also sent a letter to the agency protesting the merger. They have criticized RBC’s refusal to divest from fossil fuel investments, noting that while HSBC said globally in December it would stop financing many oil and gas projects, the bank is excluding its Canadian division from that policy change due to the acquisition process of RBC.
For its part, RBC states that it is committed to taking action to combat climate change and working with its customers to reduce their carbon emissions. On the HSBC deal, spokesperson Andrew McGrath said one of the reasons the acquisition was attractive to RBC was because of HSBC’s own sustainable finance offerings.
“We know that the Treasury Secretary’s number one priority is to protect the public interest and ensure the safety and soundness of Canada’s financial system,” McGrath said, adding that the proposed deal supports that priority “by increasing of the Canadian financial sector in Canadian hands.”
Quaid said it is unlikely the agency would give much weight to climate-related concerns, but added that the Treasury Secretary could take such factors into account as part of a consideration of the wider public interest.
Still, she said, the biggest factor for the government is probably the strength of Canada’s banking sector.
“I don’t think green concerns or even a little bit of concentration will interfere with the reliability and stability of the banking system.”
