Banking giant HSBC Holdings PLC is fielding offers for part of its Canadian unit, signalling that its massive worldwide restructuring is unlikely to leave its operation here untouched.
The U.K. bank has opened up the books on its Canadian retail brokerage, which manages more than $30-billion of investors’ money, to potential bidders. The financial statements are now being reviewed by at least one interested party and a formal deal could materialize in the near future, The Globe and Mail has learned.
The news is likely to catch some people off guard because Stuart Gulliver, the recently appointed head of HSBC, said just last month on a visit to Toronto that the Canadian operations would not affected by his overhaul of one of the world’s largest financial institutions. The bank has said it will lay off 30,000 people worldwide by 2013 and has been shedding assets, including branches and its U.S. credit card unit.
Yet ongoing volatility in the European banking sector has left HSBC’s plans in flux, and some people in the wealth management industry say its Canadian retail brokerage has been suffering from a declining profile for years.
It is a good time for HSBC to sell. Wealth management is a hot sector coming out of the Great Recession. Financial institutions have been forced to carry more capital because of reforms, but the business of managing money and providing investment advice does not require much capital. And it provides the banks with money management fees that aren’t nearly as volatile as investment banking advisory fees or trading revenues.
Although no suitors have been formally named, National Bank Financial is widely said to be in the running. The majority of HSBC’s wealth management money is located on the west coast, and Quebec-based National Bank has been trying to expand into Western Canada for years.
National also just bought Wellington West Holdings Inc. to beef up its wealth management unit, so acquiring HSBC would be the second part of a one-two punch.
The two banks also have an established relationship. About a year ago, HSBC outsourced its back office operations, which include trade clearing, to National Bank, so some of the integration has already taken place.
It is unclear how much the HSBC unit is worth. Typically, wealth management operations are sold for a price equal to a small percentage of assets under management.
National Bank bought Wellington West at a value of $333-million earlier this year – though that deal came not just with brokers but with about 20 members of Wellington’s trading, research and investment banking staff. In a depressed market in 2009, Macquarie Group bought the wealth management division of Blackmont for $93-million, a price equal to about 1.4 per cent of funds under management.
There have been rumours that HSBC would look to selling its retail brokerage because the unit’s prominence has been dwindling. Some of its biggest brokers have jumped ship to other Bay Street firms. Those who have stayed have limited resources, because HSBC’s investment bank doesn’t have much in the way of Canadian equity or credit research to offer.
The division is on the block after Mr. Gulliver announced in April that he is engineering a strategic makeover to save the global bank as much as $3.5-billion. HSBC, which has 95 million customers and operates in 87 countries, has been criticized in recent years for not being focused enough.
Mr. Gulliver is now retrenching, exiting certain markets and cutting 1 in 10 employees globally. A key piece of the revamp is to shift the bank’s focus more towards Asia, which has led to job cuts or asset sales in France, Britain, Russia, Poland and the United States.
Although the Canadian retail brokerage is on the chopping block, HSBC Bank Canada’s core personal banking operations are closely protected because they have long been profitable.
That Mr. Gulliver is willing to sell any Canadian assets at all, however, contradicts previous comments.
“Canada is double leverage to the emerging markets,” Mr. Gulliver told The Globe and Mail on his first trip to Canada after being named CEO of the bank in September. “It both supplies the emerging markets with commodities, but also the emerging market supplies Canada with its immigrant population. ... In many ways you can almost bracket Canada with emerging markets in the analysis that we do as a bank. So, to be crystal clear, it's not for sale.”
A spokeswoman for HSBC Canada said last week that there has been no change in position from Mr. Gulliver’s statements in July.
Like many European banks, HSBC has come under intense pressure since July as the European debt crisis worsens. Falling share prices are hampering the ability of many European banks to raise money. Meanwhile, borrowing costs are going up and regulators have begun to worry about a freeze in interbank lending. Not surprisingly, many European banks are now being forced to reconsider their balance sheets and revisit strategy decision.
Among the biggest of HSBC’s asset sales is the recently announced the sale of its U.S. credit card business to Capital One for $32.7-billion (U.S.). The bank has cut back nearly half of its slumping branch network in the U.S., closing about a dozen branches and selling 195 others to First Niagara Financial Group Inc. for $1-billion.