DBRS Comments on National Bank’s Acquisition of HSBC Canada’s Full-Service Investment Advisory Business

DBRS views the National Bank of Canada (NA or the Bank) announcement of an agreement to acquire the full-service investment advisory business of HSBC Securities (Canada) Inc. and certain assets related to the segregated fund and insurance business of HSBC Insurance Agency (Canada) Inc. (collectively, the Full-Services Investment Advisory Business) as consistent with NA’s strategy to expand it wealth management capabilities. Given the size of the acquisition and NA’s knowledge of the acquired businesses, there are no rating implications.

NA will pay $206 million in cash, with goodwill and intangibles accounting for most of the purchase price. Management has indicated the acquisition is expected to be accretive to NA’s earnings per share (EPS) in 2012 and 2013 of $0.03 to $0.05. The Basel III Common Equity ratio is estimated to decrease by 40 basis points (8.0% at Q3 2011). The transaction is expected to close in December 2011, subject to regulatory approvals.

The Full-Services Investment Advisory Business has 120 investment advisors located in 27 offices in Canada and $14.2 billion in assets under administration. The combined entity of Full-Services Investment Advisory Business, Wellington West and NA’s existing business will have added scale, with 1,060 investment advisors and $80 billion in assets under administration. With 70% of the acquired business centred in Ontario and British Columbia, geographic diversification improves. Notwithstanding the benefits, one of the challenges for NA will be to retain investment advisors.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (January 14, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009) and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on the DBRS website under Methodologies.