Could 2024 see Canada’s top banks gobble up competitors?

Mergers and acquisitions saw a 'high, unprecedented level of activity' in Canada's banking sector in 2023

Could 2024 see Canada’s top banks gobble up competitors?

It was a move that set tongues wagging and stoked controversy in Canada’s banking space: the announcement by Royal Bank of Canada (RBC) that it was to purchase HSBC’s Canadian division in a blockbuster $13.5 billion deal marking the takeover by the nation’s biggest bank of its seventh largest.

That proposed merger, announced in November last year, seemed to mark the end of a flurry of speculation about HSBC’s future in Canada after it was announced the banking giant was putting its Canadian operations up for sale as part of an extensive restructuring.

But it’s been a deal fraught with complications, facing political pressure from Ottawa with federal opposition leader Pierre Poilievre calling for the government to block the move and the House of Commons finance committee also urging rejection of the acquisition.

The purchase, which is currently up for review by Canada’s banking regulator (OSFI, the Office of the Superintendent of Financial Institutions) and the federal finance ministry, is still expected to close in the opening months of next year.

However, observers will be keeping a close eye on whether the merger – which RBC says will provide more banking value and convenience for Canadians – is a sign of things to come in the national banking space, particularly with accounting firm BDO Canada’s latest debt market report noting a “high, unprecedented level of M&A [merger and acquisition] activity” in the sector throughout 2023.

Also of note in 2023 was National Bank’s move during the summer to purchase the Canadian commercial loan portfolio of troubled lender Silicon Valley Bank (SVB), valued at around $1 billion, as the smallest of the country’s top six lenders made a concerted bid to strengthen in the tech sector.

But there’s a big reason M&A activity in 2024 is expected to be much more subdued, according to Shilpa Mishra, partner and leader, capital advisory at BDO Canada’s M&A and capital markets division: namely, the troubled economic outlook and a more conservative approach among major lenders.

“Looking forward, the Canadian banks are working with tighter liquidity and capital constraints and given the higher rates and tighter liquidity, we do not see more M&A from the banks in the near future,” she told Canadian Mortgage Professional.

Restructuring, rather than expansion, the name of the game for 2024

That’s not to say significant changes aren’t in the offing – but adjustments by top lenders aren’t expected to include sizeable expansion, Mishra said.

“We do anticipate more restructuring ahead. Most specifically, for example, in September BMO [Bank of Montreal] announced it would be closing its auto finance business,” she said. “So there’s going to be restructuring, but given the tighter liquidity in the economy, potentially no more future M&As from Canadian banks.”

While the US financial sector was riven by uncertainty in 2023 following the high-profile collapses of SVB and Signature Bank during the spring, BDO Canada’s new report emphasizes that the outlook continues to be more serene north of the border – even despite gathering economic storm clouds.

That’s because the Canadian banking sector is dominated by six major players, it said, unlike the US where thousands of regional banks exert considerable influence. Canadian lending practices also remain conservative, the company said, “given stringent regulatory supervision, regular legislative reviews, and tight capital regulation.”

Caution, conservative outlook likely to blunt lending appetite in year ahead

Nonetheless, the cautious current outlook of Canada’s banking giants has been reflected in their financial results for 2023’s third quarter, with climbing provisions for loan losses once again among the most noteworthy takeaways from those earnings statements.

There’s little indication on the horizon that the nation’s top lenders are prepared to throw that conservatism to the wind just yet, according to Mishra. That reality is likely to weigh heavily on the lending outlook for 2024, too.

“They’ve reported mixed results for the third quarter, mostly because of higher provisions for credit losses and expenses. Several banks have announced layoffs in the third quarter of 2023 and they’re also restructuring their lending and capital markets business,” she said. “So overall, there is uncertainty in the economy – but the pace of lending by the Canadian banks has drastically slowed.”

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