HSBC Holdings PLC (LSE:HSBA)’s sale of its Canadian arm to the Royal Bank of Canada (TSX:RY) went “better than expected”, according to equity research director Andrew Coombs at Citigroup.
The FTSE 100-listed bank disposed of over 130 branches and 780,000 customers for CA$13.5bn (US$10.1bn, £8.3bn), ahead of market expectations of CA$9bn and “well ahead” of Citi’s expected valuation of the business based on peer group multiples.
The disposal is due to be completed in the fourth quarter of 2023.
According to Coombs, the capital gain, if completed as of the end of September 2023, would be US$5.7bn (CA$7.7bn, £4.75bn), while the common equity tier 1 (CET1) ratio would be lifted to 14.7%, at least 200 basis points above the target range.
“All this for an estimated loss of only 3% of revenues and earnings,” said Coombs.
He reiterated Citi’s buy rating for HSBC shares with a target price of 580p, noting a price-to-earnings ratio of 19x that “appears to be an excellent price and could accelerate the potential to reinstate buybacks".
A substantial dividend payout is also expected to be announced.
"The board will proactively consider opportunities for organic growth and investment, and the appropriate amount of additional surplus capital created as a consequence of this transaction to be returned by way of a one-off dividend and/or share buybacks," the bank said in a statement on Tuesday.