RBC becomes bigger bank, and bigger target, as it closes HSBC Canada deal

Royal Bank of Canada has reinforced its status as Canada’s biggest companyafter successfully navigating its takeover of HSBC Canada, making it an even bigger target for critics.

The bank is now worth about $193 billion, some $50 billion ahead of second-place TD Bank, after RBC saw a roughly 24% rebound in its stock price over the two months before the federal government approved the deal just before Christmas.

Besides regulatory approval, some of the most daunting aspects of the takeover happened this past week, as the bank shifted some 780,000 HSBC customers and 4,500 employees over to its systems and transformed about 100 branches to RBC blue.

Chief executive Dave McKay credits the “near-flawless” transition to extensive planning and dress rehearsals, which the company had ample time to do in the 18-month space between agreeing to the $13.5 billion deal and it finally happening.

The bank is now turning to integration, and the opportunities ahead, McKay said in an interview.

“We’re extremely excited about the future, and about the ability to build a bank that connects Canadian businesses and consumers to the world.”

The deal faced criticism for allowing such a dominant player to get even bigger, in what is already a concentrated banking sector, but McKay said it will be good for the economy.

“Productivity is about scale. Productivity is about connecting businesses and consumers globally, and doing more business globally and building our country.”

The scale of the company, however, has also meant it has been the focus of intense scrutiny over its record. Nowhere has that been the case more than on its climate policies.

Being so big has helped lead RBC to be one of the world’s top financiers to fossil fuels in recent years. The Rainforest Action Network pegged the bank’soil and gas funding for 2022 at more than US$38 billion to make it rank second globally.

The activity has led to grassroots campaigns against the bank, along with pressure from major international asset managers.

The head of New York City’s pension system, overseeing US$242 billion in assets, pushed RBC in a shareholder resolution to disclose how its clean energy financing stacks up against its fossil fuel record.

In pushing for the change at RBC and five major U.S. banks to adopt the metric, Comptroller Brad Lander said they have made little progress in the energy finance transition and weren’t living up to their net-zero commitments.

Research group BloombergNEF, which pioneered the metric, figured in its latest report that RBC provided 37 cents in clean energy funding for every dollar to fossil fuels, while banks need to reach a ratio of 4:1 by 2030 to limit warming to 1.5 degrees C.

RBC’s board of directors rejected the proposal in its proxy circular, saying the metric was premature and that the bank disclosures provide sufficient transparency.

But after Citi and JPMorgan recently agreed to disclose the metric, RBC has also changed its tune.

“We think it’s an important metric going forward,” said McKay, committing to releasing the ratio in its 2024 climate report.

In a statement, Lander welcomed the decision, while emphasizing that the transition is going far too slowly.

Stand.earth climate finance director Richard Brooks said it was rare for a company to capitulate on a shareholder proposal at this stage, with RBC’s annual general meeting just over a week away.

He said it’s good that RBC will be releasing such important information, but it’s just a start.

“The next step that they need to take, which is the more important one, is they need to fix that ratio,” said Brooks.

RBC has already made several major moves in recent months in that direction, including the release of a framework on how it plans to engage with clients on climate, a commitment to triple its renewable funding to $15 billion by 2030, the launch of an internal climate institute, and funding promises on innovation.

“All of those are designed to encourage the transition, and enable the transition of our economy,” said McKay.

“We have to do it in a way that brings all our citizens with us, and aligns with the overall objectives of our government and our society.”

While the bank has made significant moves on the climate file, he said the bank can’t move any faster than Canada’s overall shift.

“RBC can’t get ahead of its own country … we can’t move faster.”

Brooks challenged that notion, saying RBC isn’t limited in its lending to what’s going on closer to home.

“If Canada is not where it needs to be in terms of the energy transition, that doesn’t excuse RBC, who portrays themselves as a global bank, from lending into other jurisdictions.”

He said that while RBC is beginning to improve, they’re already so far behind where they should be, especially given their scale.

“As Canada’s largest bank, and in a very big way, you know, miles ahead of the number two …  they should be doing more to help Canada catch up to where it needs to be in the energy transition.”

McKay pushed back against some of his more vocal critics, without naming any, saying that RBC is being unfairly criticized when it’s showing leadership.

“The expectations of a very small part of the economy are excessive on banks … but in reality, they represent a very small part of the overall sentiment.”

And just as RBC has faced the most scrutiny because of its scale, that size will also allow the bank to help get an increasing number of renewable energy and other climate efforts going, said McKay.

“We have connectivity into all corners of the economy, and we’re best placed to help these opportunities find investors, and find financing to get off the ground,” he said.

Progress on the climate is only one area McKay will have to focus on as he leads such a large organization, with work still ahead on the HSBC integration, U.S. expansion, and many other possibilities for the financial juggernaut.

“I’m incredibly excited about the future … I have a lot of work to do, and I’m very excited about the growth and opportunity for RBC going forward.”