Royal Bank of Canada’s deal to buy HSBC Holdings Plc’s Canada unit shouldn’t be a surprise to investors, but the high purchase price is “jarring”, according to Meny Grauman, analyst at Scotia Capital Inc.

In a note to clients on Tuesday, Grauman said the sticker price for HSBC’s Canada unit was on the higher end of the price range that most analysts expected.

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“The fact that Royal Bank is acquiring HSBC Canada should not surprise anyone who has read a financial paper in Canada over the past two months, but what is a little jarring is the purchase price of $13.5 billion which is certainly higher than even the high end of the price range ($8 to $11 billion) that most speculated this highly coveted asset would go for,” Grauman said in the note.

“Certainly 2.5x [times] current tangible book is a steep multiple, but we note that it does not include $740 million in targeted synergies that RY [Royal Bank] expects to realize by 2024 and which works out to 55 per cent of HSBC’s projected cost-base in that out year.”

Royal Bank announced on Tuesday that it would be buying the country’s seventh-largest bank for $13.5 billion in cash. The deal will give Royal bank about 130 more branches across Canada.

Grauman said instead of the high price tag, investors should focus on the fully-synergized price-to-earnings (P/E) multiple.

“That (P/E multiple under 9.5 times) makes the financials of this deal actually quite compelling,” he said.

“We also don’t discount the strategic value of this asset either given a large cross-sell opportunity.”

However, Grauman added that the only concern he has about the deal is whether it will clear regulatory review.

Royal Bank held a conference call with investors about the deal on Tuesday. On the call, Chief Executive Officer Dave McKay reassured investors that he thinks there’s no reason to believe there will be any competition concerns with the HSBC deal.

BREAKING DOWN STRATEGY

Grauman said he thinks Royal Bank could stand to significantly benefit from HSBC Canada’s global presence and connection to newcomers.

“From a strategic point of view, RY (Royal Bank) is highlighting HSBC Canada’s trade finance and global cash management capabilities on the commercial side,” he said.

“Meanwhile, on the retail side RY (Royal Bank) notes HSBC’s connectivity to newcomers to Canada which is a big area of projected growth for the entire sector. The bank also notes that HSBC Canada is much less successful at cross-selling than RBC is, and even weaker on this front than the peer average.”