The final deadline has passed for public input to Finance Minister Chrystia Freeland, who has to decide whether RBC should be allowed proceed with its acquisition of HSBC Canada, and if so under what conditions.
Of all stakeholders that could be affected by the 2nd largest bank in Canada swallowing up the 7th largest, businesses in B.C. will be affected the most, and not in a good way.
HSBC Canada is the only one of the top 10 banks with a head office west of Toronto and one of the few left of any sector. According to the Business Council of BC, Canada and B.C. have been losing their head offices for more than a decade.
The CEO of HSBC Canada was the only bank CEO most people in B.C. were ever likely to meet or see at local events. HSBC was typically the most active of the banks for a wide variety of causes. Those gaps are not likely to be filled since RBC already has a full suite of community commitments.
HSBC Canada punches well above its 7th position in Canada as a whole. The parent bank, with over $3 trillion US in assets, is the 8th largest in the world, twice the size of the TD or RBC. HSBC Bank maintained its status as one of the 10 largest and five most innovative (Global Finance 2023) banks in the world.
HSBC is a global bank, with revenues and profit less reliant on its home country every year while RBC, like all the Canadian banks, is a homebody.
HSBC Canada, like Laurentian Bank, are business-focused banks. They don’t have the luxury of deciding which of several lines of business on which to focus their effort and capital.
The big Canadian banks have been frozen by decisions of past governments and regulators into their current configuration as multi-line, universal banks, not allowed to buy each other or be bought.
They compete fiercely with each other but in a stilted way that entails monitoring the profitability, risk and return on capital for each line of business and making sure the best talent and most capital is focused on activities that reliably generate the highest return for the lowest risk.
Capital markets, wealth management, residential mortgages and retail deposits are usually the top performers in this standardized business model. This has held true since the 1980s when each bank was permitted to buy a securities dealer in transactions that could be construed as reverse takeovers when you look at the backgrounds of many of Canadian bank CEOs from that time on.
The C.D. Howe Institute made a convincing argument that the focus and balance sheets of Canada’s banks are warped by the 85% guarantee of residential mortgages covered by CMHC insurance and suggests that the current incentives that cause banks to focus on mortgage lending should adjusted to focus on business investment.
Given Canada’s housing crisis, that is not going to happen. Commercial banking is hard. To do it well it needs to be the core focus of the organization.
Commercial banking is a core business at HSBC, one of three main categories identified in the bank’s annual report. At RBC commercial banking is not a specific focus and is lumped in with retail banking into what they call the Personal and Commercial Banking group.
From my own experience as a banker, corporate treasurer and consultant, my strong impression is Canadian banks are much more likely to focus on personal assets as the collateral and to require personal guarantees as security. It is hard to get good data from comparable situations, but lawyers and fintechs involved in business financing on both sides of the border have said requirements for personal guarantees are certainly more prevalent and less negotiable in Canada than in the US.
For those of us that have been around awhile, there is irony in the situation.
Back in 2004 the Bank of International Settlements published the second Basel Framework for global banking regulation. Canada is a member of the Basel committee and we in Canada are very proud of our very safe, sound and tightly regulated banking system.
I was a commercial lender with RBC in Vancouver then and was directly involved in what transpired in 2005 when OSFI implemented the new framework that required banks to examine credit exposures for each line of business in a more granular fashion and report them at a consolidated level.
Differences in the return on capital between lines of business became impossible to ignore. In 2005 RBC concluded it had to withdraw from many long-standing commercial banking relationships across the country. Particularly ones that featured large credit exposures with not enough being earned in interest and fees generate a return equal to what it was earning from its other businesses.
It was particularly painful for RBC’s BC commercial lenders. RBC had up to that time built up a bigger share of the market than the bank had other parts of the country. There were many uncomfortable meetings with long standing RBC clients to tell them they either had to accept new pricing that was above market or find another lender.
Luckily for the bank’s BC customers, HSBC – which purchased Bank of BC in 1986 – had the staff, systems and the capital to take on many of the spurned RBC borrowers, often with better pricing and terms than were better than the company had been paying before.
At companies where the owners and chief financial officer might have been around 20 years ago, they might not look forward to being an RBC customer again.
However, this is not an RBC problem. It is a problem with the structure of the Canadian banking system. What happens when another change in the regulatory framework or disruption in financial markets results in Canadian banks deciding they need to reduce their exposure to a business that is inherently volatile and difficult?
Without financial institutions dedicated to the future of Canadian businesses, owners and managers of those businesses will not have the support they need to invest to increase productivity and reach optimum scale. The productivity of the Canadian economy will continue to decline and we will all get poorer as a result.
The acquisition of HSBC by RBC appears to be a foregone conclusion. The better question may be: what is the minister going to do to support financing to businesses in British Columbia and across the country?
Guy Heywood, a former banker and CPA, is principal of Corporate Banking Advisory. He advises companies on financing strategies and technology.