HSBC Bank Canada is trying to unload its consumer finance division in yet another shakeup triggered by its parent bank’s global asset sale.
One day after HSBC announced that National Bank of Canada is buying its retail brokerage for $206-million in cash, The Globe and Mail has learned that HSBC Finance Canada, a consumer lending unit, is also on the auction block. Negotiations are ongoing, but a sale would mark the second Canadian asset to be divested as part of the major restructuring of HSBC Holdings PLC, which is selling non-core assets and cutting costs.
HSBC Finance Canada has two business lines: private-label credit cards, which often carry higher interest rates than bank-issued cards and are issued by companies such as furniture retailer The Brick; and a branch network that underwrites mortgages and unsecured loans. They are classified as non-prime, which means they are riskier than retail bank loans but not as much as subprime lending.
Offers for this division would likely top the price paid for the retail brokerage. Although HSBC Finance Canada isn’t as well-known as the wealth management arm, it employs more than 1,000 people and churned out a pre-tax profit of $15-million last quarter. The sale would also have a bigger impact on HSBC’s balance sheet by freeing up capital. Because consumer finance loans are made to riskier clients, the bank must set aside a chunk of capital to offset the higher likelihood of defaults.
The division no longer fits into HSBC’s portfolio largely because it is the only active unit remaining from HSBC’s $14.2-billion (U.S.) acquisition of Household International in 2003. That deal proved to be disastrous: Household was heavily involved in brokered subprime mortgages south of the border and fostered billions in impairment charges. Tired of bleeding money, HSBC started to wind the business down in 2009.
The Canadian arm has been restructured multiple times since then and some branches have been closed. It remains profitable because the high-margin loans offset losses created by defaults, and the stable Canadian economy limited financial hardships. But a sustained economic downturn would hit the division’s bottom line.
This isn’t the first time that HSBC Bank Canada has entertained offers for the consumer finance division. At least two parties put in bids during two previous negotiation rounds, a source familiar with the current negotiations said, but a deal could not be reached. The same scenario could play out this time, in which case the unit could be wound down rather than sold.
An HSBC spokesperson said the bank does not comment on rumours or speculation, but HSBC Bank Canada chief executive officer Lindsay Gordon left open the possibility of future asset sales in an interview on Tuesday. Asked if anything was in the works, he said he is happy with the bank’s structure following the retail brokerage sale, but that “doesn’t mean there won’t be changes.”
HSBC isn’t the only bank with such a unit in Canada. In 2006, just before the financial crisis took hold, Toronto-Dominion bank purchased VFC Inc., which focused on non-prime auto purchase financing in Canada. That unit still exists, but has been re-branded as TD Financing Services, which provides prime and non-prime auto financing, recreational vehicle lending, and specialty finance mortgages. Wells Fargo Financial also operated in Canada, but that division has been wound down.
HSBC Holdings PLC has been looking to sell off non-core assets since chief executive officer Stuart Gulliver announced in April that he wanted to cut costs by $3.5-billion. To do so, the bank will lay off 1 in 10 workers globally and shift its focus toward Asia. Asset sales have included the U.S. credit-card division, bought in August by Capital One for $2.6-billion (U.S.), more than the face value of its outstanding loans.
Despite the makeover, Mr. Gulliver said during a trip to Toronto in July that the Canadian bank was safe from changes.