LONDON: HSBC Latin America B.V., a wholly owned subsidiary of HSBC Holdings plc, has entered into a binding agreement to sell its business in Argentina to Grupo Financiero Galicia, the largest private financial group in Argentina.
Noel Quinn, Group Chief Executive, said: “We are pleased to agree the sale of HSBC Argentina. This transaction is another important step in the execution of our strategy and enables us to focus our resources on higher value opportunities across our international network.
HSBC Argentina is largely a domestically focused business, with limited connectivity to the rest of our international network. Furthermore, given its size, it also generates substantial earnings volatility for the Group when its results are translated into US dollars. Galicia is better placed to invest in and grow the business.
“We remain committed to Mexico and the US, and to serving our international clients throughout our global network with our leading transaction banking capabilities.”
Financial terms
Galicia will acquire all of HSBC Argentina’s business covering banking, asset management and insurance, together with US$100m of subordinated debt issued by HSBC Argentina and held by other HSBC entities, for a consideration of US$550m, which will be adjusted for the results of the business and fair value gains or losses on HSBC Argentina’s securities portfolios during the period between 31 December 2023 and closing.
HSBC expects to receive the purchase consideration in a combination of cash, loan notes and Galicia’s American Depositary Receipts (ADRs), with ADRs accounting for around half of the consideration received and representing less than a 10% economic interest in Galicia.
Financial impact of the sale
Financial impacts of the transaction on the HSBC Group are currently expected to be (based on financials as at 29 February 2024):
A US$1.0bn pre-tax loss upon reclassification of the business as held for sale in the first quarter of 2024. There would be no tax deduction on the loss recognised. Between signing and closing, the loss on sale will vary by changes in net assets of the disposed business and associated hyperinflation and foreign currency translation, the fair value of consideration including price adjustments, and migration costs.
Insignificant impact on the Group’s CET1 ratio by closing: an initial reduction of around 0.1 percentage points in 1Q24 on the recognition of the pre-tax loss on disposal, broadly offset by the estimated reduction in RWAs (on a PRA basis) on closing.
The recognition in the income statement of c.US$4.9bn in historical foreign currency translation reserve losses on closing. These reserve losses have accumulated over many years and arise from the cumulative translation of the Argentinian peso-denominated book value of HSBC Argentina into US dollars, and are included in CET1 capital at each reporting period. During 2023, as a result of devaluation in Argentina, foreign currency translation reserve losses grew by US$1.8bn. These reserve losses have already been recognised in capital; recognition in the income statement will have no impact on CET1 or tangible net asset value. As with the pre-tax loss upon completion, this amount will vary between signing and closing principally due to movements in the USD:ARS exchange rate.
The transaction will be treated as a material notable item. The HSBC Group’s dividend payout ratio target remains at 50% for 2024, excluding material notable items and related impacts. The HSBC Group continues to target a return on average tangible equity in the mid-teens for 2024, excluding the impact of notable items.
The transaction is subject to conditions, including regulatory approvals, and is expected to be completed within the next 12 months.
Grupo Financiero Galicia is a financial services holding company based in Buenos Aires, and its banking operations are the fifth largest in Argentina, as well as the largest among all domestically-owned private banks in the country.
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