HSBC Bank Canada (RY) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the RBC webcast event. Please be advised that this call is being recorded. I would like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, Mr. Imran.

Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Neil McLaughlin, Group Head, Personal and Commercial Banking; and Nadine Ahn, Chief Financial Officer. Also joining us today for your questions Graeme Hepworth, Chief Risk Officer; and Bruce Ross, Group Head, Technology and Operations. As noted on Slide 2, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also advise listeners that the bank assesses expected results and the impact of the proposed transaction based on reported and adjusted measures, management expectations and analyst consensus estimates and consider such measures to be useful in assessing expected business performance. Finally, as we are currently in a quiet period, this call will be focused on discussing today's acquisition of HSBC Canada. We will not be offering comments on our upcoming Q4 results on this call, nor will we take questions on those results. To give everyone a chance to ask questions, we ask that you limit your questions and then requeue. With that, I'll turn it over to Dave.

Thanks, Asim. And good morning, everyone, and thank you for joining us on such short notice, especially during a busy earnings week. We are extremely excited to announce an agreement to acquire HSBC Canada from HSBC Holdings plc. Over the years, you've heard me discuss our priorities when it comes to deploying capital to create long-term value for our shareholders. And a primary driver for us to engage in M&A is one that accelerates our enterprise strategy, and we have found that with HSBC Canada. It is a fantastic franchise that operates in our home market and businesses that we are very good at while also adding complementary products and a differentiated client base. There's also a strong cultural fit for both our clients and employees. The transaction is financially compelling as it also creates immediate value for the strategic deployment of excess capital, highly achievable expense savings and a well-understood revenue cross-sell opportunity. Starting on Slide 5, I will now provide more details as to why I am so excited about the announced acquisition of an excellent franchise, we have followed and competed hard against for the last 40 years. As a bank with over $130 billion in assets, servicing nearly 800,000 clients, largely in urban areas. Its loan portfolio is split fairly evenly between commercial and corporate loans on one side and largely residential mortgages on the other. HSBC Canada is a well-run bank that has a proven track record of success, as evidenced by a 14% return on equity over the last 12 months. With this transaction, RBC will be better positioned to be the bank of choice for commercial clients with international needs affluent clients needing wealth management capabilities and newcomers to Canada, especially with immigration expected to increase materially over the coming years. It will also help us better serve global clients looking to invest and grow in Canada, which is key for the country's economic growth and prosperity. Beyond the financial and strategic benefits to adding HSBC Canada, what we're really excited about is the power of the combined platform. Slide 6 highlights how the proposed acquisition creates even more value for a wider set of clients. And our multi-award-winning platform helps drive deep relationships where 19% of our clients have all 4 transaction accounts, credit cards, investments and boring products, with RBC. This is well above the industry average of 11% and more than double the ratio at HSBC Canada. Therefore, we believe our combined product and service offerings should drive more compelling cross-sell opportunities across retail and business banking. This creates a potential upside to our estimates as we have conservatively not modeled any revenue opportunities from cross-selling in the accretion model. In particular, HSBC Canada has an established reputation of being a premier commercial bank with an advanced trade finance and global cash management value proposition. And its multicurrency product also acts as an expanded offering to RBC's newcomer and globally minded clients. We believe these capabilities will both continue to attract new clients while also benefiting RBC's existing client base. In turn, RBC brings a powerful set of payments capabilities to HSBC Canada's 770,000 retail clients, including Avion Rewards, our parity loyalty program. Furthermore, RBC Vantage, our everyday Canadian banking offering, brings us together a comprehensive suite of powerful benefits for our clients, incentivizing even deeper client relationships. There's also the opportunity to deploy the full suite of RBC's leading wealth management and private banking solutions to HSBC Canada's affluent client base. Neil will speak more about these opportunities in a few minutes. The bottom line is that our combined platform will enable us to provide a more valuable offering to a wider set of clients. We also have identified significant expense synergies, making the transaction a very accretive deployment of capital. As seen on Slide 7, we estimate the transaction to result in $1.4 billion of fully synergized earnings in 2024. We expect these earnings to provide a stable source of recurring internal capital generation, which in turn gives us optionality in the future. We estimate the transaction to add 6% to 2024 earnings per share, delivering an internal rate of return of 14%, well above our cost of capital. RBC will pay a total consideration of $13.5 billion for the common equity of HSBC Canada. This implies a price to tangible book value of 2.5x at close with a high-quality bank. However, the real value of the bank are the earnings realized under RBC's business model, which imply a forward price earnings multiple of 9.4x fully synergized earnings. This is below the historic Canadian Bank average multiple of 10.5x forward earnings. Furthermore, the purchase price is structured using a locked-box mechanism. Accordingly, all of HSBC Canada's earnings from June 30, 2022, to close will accrue to RBC. Adjusting for this, the fully synergized multiple would be under 9x forward earnings per share. Slide 8 shows our recent history when it comes to mergers and acquisitions. Our proposed transaction of HSBC Canada meets our criteria of acquiring a high-quality franchise which provides value-added advice to premium clients in a structurally attractive market. And it follows on our recently completed acquisition of Brewin Dolphin, a premium U.K. wealth manager offering services across the wealth spectrum, including complex solutions for high net worth clients. This narrative originally started with the acquisition of City National Bank, which has only added to its reputation of being a strong U.S. commercial bank with a premium private bank serving high net worth clients as well. Cultural alignment is another critical element that defines the long-term success of any relationship, and we believe our 2 companies are an excellent fit. Slide 9 highlights how HSBC Canada's purpose-driven culture matches our own commitment to our clients and communities. For us, diversity and inclusion is more than just a value but a key strength and one, which has received meaningful awards and accolades. We also have a shared focus on sustainability. HSBC Canada has been a pioneer in launching sustainable products in Canada, and we are committed to providing $500 billion in sustainable finance by 2025. We also remain committed to the distribution of the economic value we create to push for a better future for our clients and communities and higher earnings from our Canadian businesses means more is distributed to those who benefit from our successes. In this regard, we distribute a significant portion of our earnings as a result of being one of Canada's highest taxpayers. And each year, we donate 1% of our pretax Canadian net income to help those in need within our communities. Finally, we distribute a significant portion of our earnings to our shareholders, the majority of whom are based in Canada. In conclusion, we look forward to combining our complementary businesses and offering an expanded value proposition to an attractive client base while materially adding to our sustainable earnings stream. And now I'll pass it over to Neil McLaughlin, Group Head, Personal and Commercial Banking. Neil, over to you.

Thanks, Dave, and good morning, everyone. I'm excited by today's announcement, and everyone at RBC is looking forward to working with our new colleagues and ensure we maintain a high level of service, which clients have come to expect. We're excited about the potential opportunities to leverage the cross-selling power of our 2 businesses. I'll start with the retail banking business on Slide 11 and speak to 2 strategies, namely newcomers and affluent clients. As Dave mentioned, the acquisition of HSBC Canada better positions RBC to be the bank of choice for newcomers to Canada. Today's announcement, combined with our recently announced partnership with ICICI Bank Canada further widens an important client acquisition model for us. With over 60% of HSBC Canada's over 770,000 retail clients having global connectivity, we look forward to incorporating various new banking solutions into our existing strategies in order to create a more seamless transition for newcomers. HSBC Bank's products also allow us to enhance our presence amongst global families and businesses that are coming to Canada. On the affluent segment, a significant 40% of HSBC Canada's retail loans are to affluent clients, a higher ratio than our own client base. And given the affluent nature of these clients, it's not surprising to see average mortgage principal amounts which are materially higher than our average. And while mortgage balances are fairly large across the portfolio, there has been a limited pickup of certain nonbanking products. We believe our broad product offerings across credit cards, wealth management, asset management and private banking will prove to be an attractive client value proposition for these affluent customers. I'll now move on to the business banking platform on Slide 12. HSBC Canada's commercial client base skews to a larger segment, which is bigger than where we currently compete in Canadian Banking. This acquisition further extends our client acquisition capabilities and aligns to our current strategy to grow upmarket. And as these large commercial accounts grow even larger, we think there are opportunities for these businesses to be served by our leading RBC Capital Markets platform. Furthermore, the company's international cash management and trade finance expertise will help to accelerate our own technology road map while also benefiting our existing clients. With over 50% of HSBC Canada's commercial banking clients being globally connected, this transaction also positions us as the bank of choice for commercial clients that have international needs. Before I wrap up, it's important to highlight the power of relationships and being a trusted adviser to your clients. It's why 90% of HSBC Canada's relationship managers have a tenure of over 5 years and it's why approximately 80% of its clients are long tenured. We look forward to welcoming both clients and employees to the RBC family. And with that, I'll turn it over to Nadine.

Thanks, Neil, and good morning, everyone. I will start on Slide 14 with some key details of the announced transaction. This morning, we announced an agreement to acquire the common equity of HSBC Canada in a $13.5 billion transaction with 100% of the consideration paid in cash. Importantly, HSBC Canada's earnings from June 30 of this year to acquisition close, will accrue to RBC, therefore, having an implied impact of lowering the net consideration. We expect HSBC Canada to generate over $1 billion of earnings during that period, bringing its CET1 ratio to approximately 13% at close. We expect RBC to remain well capitalized with a pro forma CET1 ratio exceeding 11.5% at close and we would expect HSBC Canada's additional net income to add to our capital accretion going forward. RBC will also purchase at par HSBC Canada's outstanding preferred shares and subordinated debt held by HSBC. As Dave mentioned, we expect fully synergized fiscal 2024 earnings of $1.4 billion or nearly $1.6 billion when adjusting for accounting impacts. I will quickly go through a few of our assumptions in the model we have included in the appendix on Slide 19. There are a number of purchase accounting factors, which would impact reported earnings over the coming years. We estimate a gross credit mark of $400 million pretax, representing approximately 50 basis points of HSBC Canada's gross loans. We have built in a level of conservatism versus HSBC Canada's current provisioning of 40 basis points of loans. Approximately $300 million of this credit mark will be allocated to performing loans and accreted into earnings over 3 years, which we assume to be the average remaining term of the loan. We've taken a further $1.4 billion pretax interest rate mark on assets. On the liability side, we've assumed a positive interest rate mark of $750 million pretax. If we include these accounting adjustments, we expect fully synergized fiscal 2024 earnings to be higher at $1.6 billion. Moving to Slide 15. I will now speak to expected expense synergies, which are an important part of the rationale behind this transaction. We are assuming $740 million of expense synergies, which represent 55% of HSBC Canada's expected 2024 expense base. We expect 20% to be realized in year 1 and over 95% to be realized by year 2. And recall, we anticipate the transaction to close by late 2023, subject to customary closing conditions. The level of synergies reflect a number of factors with the main one being the in-market nature of the acquisition. As part of our rigorous due diligence and budgeting process, we have mapped out where we expect to realize the majority of these meaningful synergies. We expect to leverage the investments in our technology and operations infrastructure to a great extent as there is a significant overlap in systems and applications, which we'll look to migrate on to our platforms. Bruce is here in the room to answer any questions. Lastly, on expenses, we expect $1 billion of acquisition and integration costs with 25% realized at close and the remainder in 2024. And finally, on to Slide 16, to discuss credit quality. HSBC Canada has a well-established risk management program and a disciplined credit culture. It is a well-diversified loan portfolio across wholesale and retail lending. As part of our robust due diligence their loan books asset quality has been assessed as within our risk appetite. I will quickly speak to 2 portfolios that garner a lot of investor interest, namely residential mortgages and commercial real estate. Graeme can answer any detailed questions you may have. HSBC Canada's residential lending portfolio is of a very high quality with portfolio metrics quite similar to our own prime mortgage book. Their commercial real estate exposure shows good diversification across geographies and asset classes. Importantly, their concentration increases in line with RBC's overall concentration so we do not see HSBC Canada as adding to our relative exposure. In closing, our excitement over this transaction reflects its benefits to both clients and shareholders. It's financially very compelling and enhances RBC's capital generation power, while also greatly enhancing the client value proposition. With that, operator, let's open the lines for Q&A.

[Operator Instructions] And your first question is from Meny Grauman from Scotiabank.

First question, just on customer retention, what you're assuming wondering what kind of risk you see around that some people are speculating that HSBC Canada's customers, they might have been HSBC Canada customers for a reason, maybe not wanting to deal with big six bank. Wanted to get your perspective on that.

Sure Meny, it's Neil McLaughlin. I'll take the question. We spent a lot of time going through HSBC's business, and I think we have a really good appreciation for what the value propositions are and taking a look at what the value proposition we have. You heard in the prepared remarks just about the strength of the international connectivity. Those are all capabilities we will be onboarding and adding to our capability set. And we have a full belief that the relationship manager tenure that we -- that I mentioned is important to maintaining those relationships. So those are the types of levers we'll be looking at to maintain that. And then we also take all the capability that we've got in our franchise. So we have a broader set of capabilities that HSBC has. We mentioned credit cards, private banking and wealth management. And we also have to think about on the consumer side, you also have to think about just the idea of convenience. We'll be able to offer these clients more convenience than they've had in the past, whether that's physical branch network, a better mobile app experience and better digital tools. So when we roll that all up in the consumer side, I think we feel quite confident. And then on the commercial side, again, relationship managers are key. And the product breadth, again, in a different -- obviously, different capacity. Our cash management, you heard Dave talk about. We have a very broad cash management system. We've been investing in, we will add some of these international money moving capabilities as well as trade finance that HSBC will bring us. And between the people and the value propositions, that's really what underpins it.

And so just to follow up on that $1.4 billion projected NIAT in 2024, including synergies, what's the retention that's being assumed there? Is it virtually 100%?

So what we have in there, Meny, is we've not included as part of any of the cross-sell that Neil had spoken about. So we've been very conservative in our revenue assumptions, both within our outlook as it relates to the capital markets businesses as well as the interest rate margin expectations. And so included in that number, we've taken a haircut on revenue, but we've also not included any of the cross-sell related to what Neil has spoken about.

Got it. And is there any quantification of that cross-sell that you could provide us? Any sort of order of magnitude that you're thinking about?

No. We've not modeled that out.

Not at this time, just that we believe it to be conservative based on all the strengths you just heard of our core deposit accounts lineup, our credit card lineup, our mutual fund lineup or investment in our cash management. And what we really like about this transaction is it allows us to leverage all the investment in technology and capabilities that we've made and bring a larger client base on to all this investment, and it's just a wonderful opportunity for clients and for our shareholders. So lever all that investment we've been talking about for the last 5 to 10 years.

The next question is from Gabriel Dechaine from National Bank Financial.

Couple of quick ones here. Is there going to be a DRIP discount anticipated in your capital plan? And just for the modeling here, the accruing of HSBC earnings from H2 of this year and most of next year or all of next year, that won't hit your income statement over the next 5 quarters or whatever? That will be a lump-sum adjustment, I assume, on close? And...

Yes Gabe -- I'm sorry. Go ahead.

And then I saw you put in your Slide 19 there, the EBIT figure and the revenues net of PCL. I was hoping you could give us a sense of what your credit assumption is because HSBC earnings this year and last have obviously been flattered by low loan losses. I'm wondering what kind of normalization you're factoring into your numbers there.

Okay. Sure. Thanks, Gabe. Sorry to sort of jump in on your question there. So in terms of capital conversations, I'll just to remarks in terms of where we forecasted we would be at close, which is at above the 11.5%. I'll refer any further conversations around capital outlook, Gabe, if you don't mind until our call tomorrow. As it relates to the earnings, that will accrue to us upon close. So that stays within consolidated within HSBC until we actually close the transaction. And then around -- your question around PCL. So we are expecting more normalization, so around the mid-20 basis points, unless Graeme wants to add anything further on that, but that's where we're forecasting in terms of what we've assumed in the model.

Yes. Gabe, I can just explain what we did there on the PCL side. I mean, we -- as part of the diligence here, we had really kind of with full loan tapes, if you will, and data went with that. And we were able to take their data and they are an ARB banks, we're able to understand their PDs and LGDs and map that to our PDs and LGDs and our ratings. And so through that, we're really able to come up with really good estimates of what kind of ACL we would put in place as this portfolio comes over. We're able to use that data to really succinctly kind of forecast or robustly forecast kind of what we think the PCL would be, both in the near term as we look at kind of more difficult kind of recession environment, but what we also would see that be in the longer term. So I think built into our model, I think, is a really robust assumption that lines up really well with how we model our own PCL.

Okay. And just a quick one. The 92% of, I guess, single product customers at HSBC, how many are loyal clients today?

Neil will take that. But no, that's not the factor of single-service clients.

Yes. Yes. They actually have -- Yes. Thanks for the question, Gabe. It's Neil. We provided a couple of data points there. One was the percentage of clients that have all 4 categories...

Okay. All 4.

Yes. All 4 categories have transactions, investments, borrowing in card is 9% and you look where we index. So to be fair, we are the industry leader. But that sort of creates that where do you think there's opportunity to bring that product fleet and then really consolidate share of wallet around those product sets.

The next question is from Doug Young from Desjardins Capital Markets.

Most of my questions have been asked and answered. But maybe, Neil, back to you because I think you mentioned something in particular, and I'm just hoping you can flesh it out, but just I guess my question is, does HSBC bring to the table anything that you don't currently have? And I think you talked a bit about trade finance and whatnot. I'm hoping just to get a better sense of what opportunity that -- if that is the case, then what opportunity that brings.

Yes. Thanks for the question. So maybe I'll start on consumer and then finish on the commercial side. So on the consumer side, one of the value propositions they have is multicurrency accounts. And so -- this is a value proposition of being able to save in euros, Hong Kong dollars and sterling. And that's something we will onboard onto our platform. They also have a capability to change on international exchanges and their discount brokerage, and a capability we don't currently provide. So there's 2 things on the consumer side. On the commercial side, you mentioned it's trade finance and its supply chain finance. These are capabilities that we do letters of credit, we do guarantees. They just have a more robust deeper product set, just given the nature of their business, and they have the client flows to go along with that. So those will be some of the capabilities, there's specifics would be things like virtual accounts for larger corporates, for notional pooling to optimize their liquidity positions. And those again are things we will build into and integrate the stacks.

The next question is from Ebrahim Poonawala from Bank of America.

Most of my questions were answered. Quick follow-up, Nadine. I know you referenced 2024 earnings, but when we think about the actual expense savings kicking in, all of that should play out in 2025, when you think about the entire synergy of the $1.4 billion showing up to the bottom line. Is that correct?

Yes. So we commented that was 2024, assuming fully synergized.

Which will actually hit in 2025?

Fully correct. Based on a run rate, correct.

Based on a -- yes, based on a run rate. And I guess, maybe just one quick one, Dave -- means, obviously, you love Canadian market share, so the deal makes sense from that regard. As we look forward, is RBC done for now as far as M&A is concerned between Brewin Dolphin and this? Or are we still open for business for like strategic opportunities that might show up?

I think this is part of an ongoing journey to build organization. Nadine will walk you through tomorrow our capital accretion and capital strategy. And therefore, we'll focus on this deal in the short term for sure. And to get through approval and to execute on the transition, it's very, very important to deliver on the value. But over time, this transaction allows us to generate significant capital and earnings as well, over 20 basis points alone from this transaction. So therefore, it positions us well to continue to execute against the strategy we've articulated to you in the market.

The next question is from Paul Holden from CIBC.

First question is regarding interest rate sensitivity. Does HSBC change the rate sensitivity for your Canadian banking business at all?

No. I mean, it's of a certain size in terms of the total book, but we will also bring it in as part of our asset liability management practices and manage the book holistically, but the rest of it also, it would be seamless from an integration standpoint that way.

Okay. Got it. And then second question, one that's come up a lot since the potential acquisition first hit the newswire. And that's kind of, I guess, concerns regarding Royal as the biggest Canadian bank buying another Canadian bank and competition type issues. How should we think about that type of risk in terms of closing this deal? Like, how do you get over that hurdle?

I'll take that one, and thanks for the question. I'd first off say, while it would be an appropriate to speculate on the Competition Bureau's review. We are not aware of any areas where the Bureau is likely to have concerns and are not aware of any reason why competition clearance will not be received. In the big scheme of things, as you mentioned, this is still a relatively small bank by market share of 2% or less. And therefore, as we go through and look at whether it's by product, by geography, we don't have any reason to believe right now or that there should be concerns. We look forward to working closely and cooperate with the Competition Bureau as they review the transaction. And just to remind you, this requires 3 different levels of approval, OSFI from a regulatory perspective, Competition Bureau and the Minister of Finance.

The next question is from Sohrab Movahedi from BMO Capital Markets.

Congratulations on the transaction. Neil, you may have answered this, but I may have missed it. I know you -- I think a lot of the assumptions around the transaction, I think you've characterized as conservative. Did you assume any attrition?

So -- yes, it's Neil. I appreciate it, Sohrab. So we -- Nadine did speak to it. So in terms of -- when we look at the portfolio, what we've basically modeled is, what are the net balances that we take over, we've taken in the net revenue. We have in our modeling made what we believe is the best estimate of what that onetime attrition blip would be. But then we did make comments earlier, just about the strength of the overall relationship management, the value propositions. And we need to keep in mind that HSBC is leaving the market. These clients will need to have somebody else to continue on with those services, and we think we're the best positioned to improve what they've had and bring that into what we do and extend the value that we bring our customers to there. So those are some of the qualitative side of what underpins what you saw in the illustrative example.

Okay. I understand that. And Dave, just maybe a slightly kind of higher-level question. I wouldn't have thought, given the excellent momentum the bank has, the traction and the presence, that having more mortgages or having to pay a goodwill premium to continue to strengthen, I guess, that center of gravity in Canada would have been of strategic priority. All the investments in digital and all the better mousetrap discussions around growing market share in Canada. So I'm just taking a bit of, I guess, a devil's advocate on this one. Why pay $8 billion or so of goodwill for 130 branches?

Well, I think if you look at the compelling financial transaction, as I said before, it's a unique kind of once-in-a-generational opportunity to leverage all the investments we've already made in building a world-class retail and commercial bank in Canada, whether it's our online banking capability or mobile banking capability, our cash management capability, our transaction banking capability or Avion Rewards, all that investment you can lever by adding the customer base of HSBC Canada and cross-selling those benefits. So when you look at the returns of doing that, then it make -- it's a compelling story to allocate capital to leverage the strength of your franchise, every organization should be looking to lever what they're really good at and capitalize on that for shareholder value, and this is the case. Now I think we have to be careful how we label HSBC Canada. It's first and foremost, a very strong commercial bank. And if you look at the split in earnings between commercial and consumer, it orientates heavily towards the commercial bank. So we're acquiring trade oriented, export-oriented, global connected commercial clients, first and foremost, and we're acquiring Global Private Banking and Canadian retail clients. So I think while the balance sheet is split 50-50, the earnings do skew towards a commercial orientation, and that's a big part of the Canadian growth story. And the third thing, and I think you can't ignore, is we're going to bring in 500,000 immigrants, a huge source of growth in any bank in this country. And when you look at the long-term partnership we signed with ICICI Bank and also the partnership that we're signing with HSBC Global, is to refer clients who are going to do business in Canada or move to Canada or live there, that exclusivity and capability is what we're adding to our franchise over time. So it's access and early looks and connectivity to the next generation of integrates that will come to this country. So that's what we're bringing in, first and foremost, commercial banking capability, globally connected clients, trade finance and multicurrency accounts and preferential access to the next-generation of clients. So we feel best fitted to serve and create value for us. So I think that's the strategic rationale, not the fact that we're just adding a book of mortgages. This is not an asset strategy. This is a client strategy at the end of the day and a client growth story.

And Dave, you -- I mean, this -- presumably, the bank would have been able to accomplish this organically. I mean -- and this just speed things up or this takes you to a different level?

Well, we do have strong organic growth capabilities as you've seen us build over time. But it took HSBC Canada 40 years to build this franchise and this P&L. So it takes a while to acquire clients and curate a multiproduct relationship and build profitability around this. So again, when you've invested so heavily in the capabilities that we have, adding a client franchise like this to the capabilities you already have that are valuable and create more value for that client franchise is an attractive strategic transaction to do. It will take a long time to acquire this many deep route of clients. And therefore, if you look at the returns and the returns are incredibly financially compelling, and therefore, it makes a lot of sense to do this.

No, I agree on the financial side. I was just more quizzing you on the strategic side.

The next question is from Mario Mendonca from TD Securities.

Dave, some questions that have already been asked, but I want to try a different take on then. You talked about the Competition Bureau already and how you don't see any reason why there's an issue there. How about just from the concept of the too-big-to-fail, like the concentration issues. Do you view this as not really having -- like, do you think it will raise any questions on that front?

No, because you're taking a bank that has less than 2% market share and adding it to our current position. It doesn't change any of the market structure. We operate in a hugely competitive Canadian banking system with credit unions, with strong banks and well-capitalized banks and competitive banks, with nonbank financial institutions. I mean, it is a very competitive marketplace. And therefore, when you look at -- and we'll go through this, when you look at the size of the bank being added to Royal, it does not change the market structure of the Canadian industry whatsoever. So from that perspective, I think that leads us to view that we are not aware of any errors where the Bureau is likely to have concerns with this type of transaction.

Sort of a different type of question then. I don't think it's any secret to anyone that Royal has aspirations to grow in the U.S. organically and inorganically. Do you -- can you say with confidence that the bank can execute on 2 transactions simultaneously, one in the U.S. and one in Canada? Or would you really have to put this one to bed before you could be serious about expanding in the U.S.?

If you look at the ability of the organization to execute a technology transition or an acquisition, yes, hypothetically, we could handle 2. The different teams, often it depends if you're going to go through a full technology integration or not. But you've got different systems with different technology teams with different operational teams and different management teams. So you could, it would strain resources in some centralized areas. But from an operational perspective, hypothetically, yes, you could.

The next question is from Lemar Persaud from Cormark Securities.

It sounds like you guys really did your homework on the synergy side, but 55% of the total cost base for a relatively established bank. I feel like I still have to ask, can you just talk about what gives you the confidence that you've got 55% of the expense base of HSBC Canada? And is it just really a massive amount of underlying systems integrations here? Are there other factors associated with hedge [ reductions ], branch closures? Anything else that you'd point to?

Neil will start with that.

Yes. Thanks for the question. I mean you heard Graeme go through the level of detail in getting to the outlook on ACL and what the credit performance is. And I'd say, we went to sort of a similar level of detail in just breaking down in the due diligence process, the cost base, what are all the activities and mapping that to what we see as a future state combined business. And so I'd say the headline is we're quite confident on the synergies we've laid out in front of you. A couple of them, I'd say, are very straightforward. So things like our branch overlap and office real estate. We've gone market by market, understood what is the client convenience we want to make sure we maintain and we have a mapping of what that looks like. That would be -- again, those clients will have more convenience in the future state than they have now. We will have all of our -- all the technology will be in-house. So a big portion of this you'll see is technology. Things like intercompany expenses come straight through a brand, and marketing is no longer needed to support HSBC Canada. So those are pretty straightforward. In terms of -- you asked a question about FTE. There are, obviously, places we will not require the same number of FTE to service the combined client base. But we have looked at that, and we feel very strongly that with the number of open jobs we have across our business and looking at where those FTE are, we will be able to welcome those employees in look at our natural attrition, our natural job requisitions and onboard that and are quite, I think, optimistic about the additional sales power. Right now, HSBC has about 2,000 client-facing advisers, and that provides us with not only more client connectivity to the current clients, but the ability to turn that productivity into onboarding new clients. So that's really how we're thinking about the synergies.

The next question is from Joo Ho Kim from Credit Suisse.

Just wanted to start off on core deposits. And I'm wondering if you can comment on the breakdown of the deposit base that you're acquiring with HSBC. I think there's a breakdown in the...

That's a great question. Nadine, do you want to run through that we've talked a lot about core deposit?

Yes, we've included some of that information for you just on the back on Slide 20 as it relates to the deposit type. So it's a very strong deposit base. It came in -- their Q3 numbers at $82 billion and it maps pretty evenly amongst core deposits, low beta, deposits, low interest-bearing deposits. And then what you've seen is about 1/3 of it is related to the term GICs. So similar to what you've seen, I would say, across other banks as interest rates have gone up, you've seen some of the shift of savings into the term GIC market, which makes it very attractive term funding basis for us at a lower cost base than would be on a wholesale basis.

Okay. So the acquisition doesn't really change your core deposit base profile? I just ask given the importance of margins.

No, it's similar to what we've seen within our own deposit base and very similarly structured in a very, very strong deposit base as it relates to demand, low cost and low beta and similar trends, as I mentioned, as we've seen on the term market.

Okay. And just last one for me. Wondering I wanted to go back to expense synergies in sort of a different way. Wondering if you can talk about any potential hurdles in achieving your expense synergy targets, whether that's regulatory or not, I think there were a couple of mentions of FTEs and potential branch or distribution optimization. Just wondering if there -- if you see any other hurdles other than those?

No, I think -- I'll just pick up on the comments I had left off on. The headline is we've gone through the cost base with a good amount of detail during the due diligence phase. I think we have a very strong understanding of what the cost base is. And you heard Nadine mention our target to get to that full run rate of cost benefits, 95% of those benefits within the first 2 years. So I'd say the confidence was quite high.

Bruce, do you want to talk a little bit about the technology integration because a big part of the cost saves are migrating onto our well-invested in platform, our strong platform. Do you want to make any -- a big part of our execution.

Just a few points to state there. I think, first of all, as Dave talked about, the scale advantage that we've created over the last number of years with our technology investments is something that now is the time that, that set of investments really comes to shine. So when you think about our mobile platform, or all of our digital client-facing platforms, including MyAdvisor, these platforms all are readily scalable to take on additional clients. So I think as we worked with HSBC, there was real excitement within their group about the ability to start moving the clients onto some of those technology platforms. Second point I'd say is HSBC runs a technology model where they're very centralized globally with very little local technology footprint. So when you look at what we need to wind down as we put this capability onto our own platform, there's really very little of that, 90% of that is really held at a global basis. And we've had a good opportunity over the last number of weeks to work with their team and how they do these types of migrations because this is not the first one that they've done globally. So leveraging that -- their capability and the real scale we have with our over 16,000 people gives us a lot of confidence in this migration. And the last point I'd say is just to Dave's point on, can we walk and chew gum at the same time? We -- yes, this is really leveraging a core part of our team. It's not a team that's we're having other things on the go, as you know, with Brewin Dolphin, et cetera. This is a unique and dedicated team. And so we feel really good about this as we go.

Thanks, Bruce. We have a couple more questions, I think, in the queue. We'll try to get them in the next 5 to 10 minutes.

The next question is from Mike Rizvanovic from KBW Research.

A question for Neil. I just wanted to go back to the revenue synergies. It does seem like something that could be a pretty big driver here longer term. But what I'm wondering about is when I look at the retail lending book, so it's on the retail side, in particular, you've got about 96% of the portfolio in [indiscernible]. It certainly looks like more of a monoline type of relationship with clients. And I would imagine those clients have this monoline type relationship with HSBC Canada, but they're fully serviced by your big 6 peers. So I'm just -- I guess I'm trying to understand how would you win that business, if it's a situation where these clients are already catered to in a very similar way within Canada on the retail side.

Yes. I appreciate the question. Maybe to start with a little bit of view of the mortgage book. High-quality mortgage book, really impressed with the credit, higher FICOs than even we have in our book. So the quality is there. I think important to point out that 91% of mortgage clients have a core deposit account with HSBC. They're making payments on those mortgages from their core checking account. So they don't have a full breadth of a product line the way we described. We don't see penetration on things like unsecured lines of credit or credit cards. They don't have as robust a digital experience or an app the way we do. But these are not -- I would not characterize these as single-service monoline mortgage customers at all. So the way we look at it is what are the -- some of the mechanisms to continue to grow that. We talked about our Vantage value proposition and Avion Rewards. These are 2 mechanisms that incent the client to consolidate their business with us and exactly the type of opportunity that you've seen grow our penetration of those transaction investment borrowing and card ratios. That's what we intend to bring those same value propositions to this customer base and expect to see -- start to trend in a similar direction.

I think Mike, it's important today to recognize that there's a reason why we're at 19% and the industries are at 11% because we're cross-selling market-leading value propositions, whether it's the Lipper Fund Awards that we get on mutual funds, to Neil's point, the RBC Vantage giving points on debit and the value proposition is so much stronger there, and the consumer value creation, the best credit card lineup in the country. So when we've proven with the investment in those value propositions for clients, it has traction. When we acquire a client, it is from one of those other banks already into the existing franchise, and we're successful in cross-selling them. So we have a proven track record over decades of executing against this with best-in-class consumer client value.

Okay. That's really helpful. Maybe just one quick follow-up on the link with Asia. And what I've been hearing from individuals is that maybe the link isn't that strong for HSBC Canada with respect to Asia. And I understand why that might be important for new Canadians coming in from that region, just knowing the HSBC name, but like how much does that actually matter in the grand scheme of things on the commercial side, like you don't really have much going on in Asia like does that really move the needle on making this deal work longer term?

Yes. You heard Dave talk a little bit about the comparison to the agreement we signed and announced with ICICI Canada. This is about tapping into that new immigration targets that have moved from 250,000 to 500,000 new Canadians. And they do have a very strong globally connected client base. So they have carved out that position in the Canadian landscape. And we believe between these 2 relationships and the product propositions that we have talked to earlier that we can very much take that over. And then in terms of those flow and referral agreements, it just puts you in a more privileged place to have that first introduction in the seamless onboarding experience and those are really, I think, the triggers to say, why can you outperform in that category.

I think, Mike, to your question, it's not the primary driver in the accretion model, as you've see. But we're trying to highlight why we think there's upside to this transaction from all of the cross-sell opportunity, the new client opportunities. We're just trying to bring some light to that bucket. So I think it's a fair question. But the accretion model stands on its own before that, and this is ancillary value that we're trying to highlight strategically for our franchise.

The next question is from Scott Chan from Canaccord Genuity.

A lot of talk about the retail side and cross-selling. But I was wondering about HSBC Canada's market-sensitive businesses. You kind of touched on discount brokerage, I know they've got private as well as asset management, a bit of capital markets. Is that for RBC more of a revenue or relative revenue synergy gain? Or is there more kind of on the cost side within those segments?

Thanks for the question. In terms of what we commented on around the projections in the model, we have looked at the capital markets revenue. And you're correct, there is some overlap from our perspective. So in terms of some of the mandates around DCM or ECM, you would expect that, that may reduce going forward. They do have a strong FX business, so that could be accretive as it relates to our business. But in addition, if you think about some of the connectivity across their broader corporate client as Neil referenced, around trade finance, there's opportunities for us in that regard. But we have recognized that and there is some overlap on the go forward, which is my earlier comments around some of the conservatism.

Next question is from Nigel D'Souza from Veritas Investment Research.

I had a follow-up question on the residential mortgage portfolio for HSBC Canada. Could you tell us the breakdown there between fixed and variable mortgages? And just to clarify for the variable mortgages, product structure, there are fixed payment or adjustable payments variable?

Sorry. I missed the last part there, Nigel. Can you still repeat that?

The product structure of the variable mortgages at HSBC Canada, is that fixed payment similar to your product structure for variable? Or is that adjustable payment where it moves with the time rate?

Yes, I can start. So maybe just put a little bit -- a little bit more color on the mortgage book. So in terms of fixed and variable, they have a little bit more of a skew to variable than we do in our current book. They have a very strong average FICO. Their LTVs are a little bit lower than ours. So those are some of the proof points we'd point to in terms of what's the overall structure. We have looked at the overall renewal timing on their portfolio. It's quite similar to ours, I would say, maybe on the variable. There's a little bit more coming due, but not significantly. And so a lot of the comments you heard Graeme and I speak to in last quarter in terms of how do we think about the renewal risk in terms of the client rate that was being paid and rolling off and what they're rolling on to and the increase in the average payments those would be similar types of delta as we would expect with this book.

And I think just to your last part of your question there was just on the nature of their variability product and how that works. And it's similar to ours. So it's a fixed payment until the interest consume the whole payment and then it increases with any further interest rate increases beyond that.

Got it. So any color on what percentage...

Nigel, I think we're going to move on to the next question, please. Nigel, thank you.

We only have a couple of minutes left, and we'll try to get through 1, maybe 2 questions in the queue.

The next question is from Doug Young from Desjardins Capital Markets.

Yes. Hopefully, this will be a quick one. This is for Nadine, but have you hedged the mark to protect your CET1 ratio? And you talked about the accretion from the marks. Can you talk a bit about that, how that will contribute to -- percentage-wise to that accretion that you've laid out? And then, Dave, did I hear you right that you have a partnership with HSBC for a referral? This is part of this agreement? Or did I not hear that? Or do you have that part, do you have a partnership?

Okay. Just quickly on your first 2 questions. So we will be evaluating and looking at how to manage that as you recognized, given interest rate profile in terms of how we look to that through close. We did comment that the $1.4 billion that we announced as part of the earnings fully synergized in 2024 would be $1.6 billion with the -- when you look at it from the accounting impact. That's also laid out for you on the slide, I think, 19. I'll let it turn over to Dave.

Yes. So we've had a lot of dialogue over the last number of weeks, as you can imagine. So we're well advanced in overall strategic opportunity to move this forward with HSBC Global. And while there's some details to work out of the same strategic mindset and it's important to both firms. .

Okay. So there's no official agreement like you have with ICICI Bank yet, but that's something you're considering or...

Right. It's not outside of the normal sales and purchase agreement yet. We could flesh out some of the details outside the SpA, but there's certainly a component of it there, as you can imagine.

The next question...

Last question.

The last question is from Gabriel Dechaine, National Bank Financial. Oh, Mr. Dechaine has removed himself from the queue.

Okay. So operator, then I'll wrap up. So thank you for taking the time this morning. I know it's been a busy morning. We're just incredibly excited about this opportunity to bring 2 strong, cultural aligned banks together. We're very excited about the customer value that we're going to create and excited about leveraging the enormous capabilities. Both sides have to better serve our customers, the value we're going to create for our communities and the value we're going to create for all Canadians, including higher tax base and higher dividends to Canadian pensioners and pension funds and investors. HSBC Canada is just a fantastic franchise, high-quality franchise, one that you'll get to know as investors over time through our eyes as well. So thank you so much for your questions today. We're very excited about the future and a very compelling financial transaction. With that, operator, I'll close it off. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.