The optics surrounding this situation are undeniably less than favorable. Royal Bank of Canada (RY) is pursuing the acquisition of HSBC Holdings’ Canadian operations for $13.5 billion—a move that, if approved, would result in the largest Canadian lender absorbing a financial institution that has been a coveted prospect for every Big Six bank CEO over the past 15 years.
At first glance, it appears to be a case of the big getting even bigger, leaving Canadians feeling squeezed. However, the reality of this transaction is more nuanced. The Competition Bureau has thoroughly examined the proposed takeover and has given its approval.
The prevailing narrative that bigger is always worse may not hold true in this case. Following the U.S. regional banking crisis earlier this year, many Americans have shifted their perspective on where they entrust their money, gravitating toward larger institutions perceived as more resilient to economic shocks.
The landscape of banking is undergoing significant changes, with technology giants like Apple aiming to disrupt the sector. There are concerns that existing banks, while substantial, might not be sufficiently large to effectively compete with these tech behemoths in the coming decade.
Despite these considerations, the recent political discourse surrounding RBC and HSBC oversimplifies matters. Federal Conservative Leader Pierre Poilievre has made affordability a focal point of his 2025 election campaign and used it as a basis to criticize the deal. He argues that such acquisitions hinder competition, which, in turn, limits the potential for lower lending rates and increased affordability for Canadians.
However, this reasoning may not be directly applicable to HSBC Canada. Unlike a disruptive startup, HSBC Canada operates more like the established Big Six banks, generating $1.2 billion before taxes over the last four quarters. The Competition Bureau’s review found that pricing decisions at RBC were primarily influenced by competition from other financial institutions rather than HSBC Canada’s offerings.
The Competition Commissioner, Matthew Boswell, known for his rigor, is not easily swayed. The bureau typically expresses concern only when the combined market share after a merger surpasses 35 percent, a threshold that RBC and HSBC do not breach in the majority of relevant local markets.
Contrary to populist rhetoric, HSBC Canada initiated the sale process, providing every bank with the opportunity to bid. While some global rivals and Canadian banks faced constraints, RBC emerged as the winning bidder.
Finance Minister Chrystia Freeland holds the key to approving or blocking the deal, and recent regulatory actions against RBC for money laundering lapses provide her with leverage. The central question for Freeland is: If not RBC, then who? Blocking the deal could diminish HSBC’s competitive threat to the Big Six over time.
Considering the limited alternatives, a sensible approach for Ottawa would be to follow the Competition Bureau’s guidance, eschew populist debates, and secure concessions from RBC. Analysts speculate that a bit of compromise from RBC might be necessary for approval.
RBC’s acquisition of HSBC Canada is attractive due to potential back-end overlap that can be streamlined. While job losses may be inevitable, RBC could proactively promise to limit these cuts, aligning with the growing trend where U.S. regulators demand such commitments.
Despite the challenges, signs suggest that RBC is open to compromise. During a conference call with analysts, CEO Dave McKay emphasized the bank’s respect for the Competition Bureau and the federal finance department. Neil McLaughlin, RBC’s Head of Personal and Commercial Banking, reiterated this sentiment, expressing confidence in the transaction and respect for the ongoing process.