Bloomberg News

RBC Said to Near Sale of U.S. Bank Unit to PNC Financial

June 17, 2011

(Updates share price in seventh paragraph and adds investors’ comments starting in seventh paragraph.)

June 17 (Bloomberg) -- Royal Bank of Canada, the nation’s biggest lender by assets, is in advanced talks to sell its U.S. retail banking unit to PNC Financial Services Group Inc., people with knowledge of the matter said.

PNC is likely to prevail over a rival bid from BB&T Corp., and a deal may come within days, said the people, who spoke on condition of anonymity because the talks are private. The business may fetch as much as $3.7 billion, according to Peter Routledge, an analyst at National Bank Financial.

“In U.S. personal and commercial banking you either go big or go home,” Routledge said in an interview today. “Royal has said they’re not going to make that big double-down bet, they’re going to go elsewhere, and I think that’s the right strategy.”

A deal would help Pittsburgh-based PNC expand its retail business in the U.S. Southeast beyond a foothold in Florida. The RBC Bank unit, based in Raleigh, North Carolina, has more than 420 branches concentrated in six states across the region. PNC Chief Executive Officer Jim Rohr, 62, told investors June 3 the bank is “disciplined” with acquisitions, preferring purchases that build 10 percent market share in “larger” cities.

“If you look at potentially what RBC’s unit could do for them, it expands PNC’s presence in an area that might be an attractive growth area,” said Craig Fehr, an analyst with Edward Jones & Co. in St. Louis, whose firm rates both banks a “buy.”

‘Rumors or Speculation’

Patrick McMahon, a spokesman for PNC, said the bank doesn’t comment on “rumors or speculation.” Katherine Gay, an RBC spokeswoman, declined to comment.

Royal Bank rose 64 cents, or 1.2 percent, to C$54.33 at 4:15 p.m. in Toronto Stock Exchange trading. PNC fell $1.68, or 2.8 percent, to $57.79 in New York Stock Exchange composite trading, its biggest drop since June 1.

PNC has retail operations in 15 states and Washington D.C., including more than 2,500 branches, according to the bank’s website. The firm acquired National City Corp. in 2009 for about $3.9 billion in stock.

“PNC has really done a good job of righting the ship post credit crisis, they’ve done a good job of growing, and we’ve seen them in a short amount of time successfully integrate the NatCity deal,” Fehr said. “They’ve shown the propensity for being able to digest some of these acquisitions.”

Centura Takeover

Royal Bank is seeking to sell RBC Bank a decade after it entered the U.S. with a $2.16 billion takeover of Centura Banks. Royal Bank is retreating from U.S. consumer lending as competitors Toronto-Dominion Bank and Bank of Montreal expand by acquiring troubled U.S. lenders.

RBC Bank has posted 11 consecutive quarterly losses as of March 31, with combined annual losses of about $3.1 billion since 2007, according to Federal Deposit Insurance Corp. filings. RBC Bank is the smallest of Royal Bank’s U.S. operations, which also include wealth management and RBC Capital Markets investment bank.

“We’ve long presumed Royal Bank had better opportunities to deploy capital in capital markets and wealth management, and that the U.S. retail or personal and commercial banking space wasn’t a good opportunity,” Routledge said from Toronto. “We thought it would be good news if they sold it and redeployed capital.”

‘Bet the Farm’

Royal Bank spent at least $4.6 billion buying a network of U.S. consumer banks over the past decade, beginning with its 2001 takeover of Centura. Toronto-based Royal Bank’s last U.S. retail bank acquisition was the $1.6 billion takeover of Alabama National BanCorporation in 2008.

“It’s a very different ball game in the U.S., it’s 10 times the size of Canada but it appears 20 times as competitive,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which manages about C$4 billion including Royal Bank shares. “In order to get scale there it’s very difficult, you almost have to bet the farm.”

Royal Bank has spent two years reorganizing RBC Bank, which started after the lender said in May 2009 that it took a C$1 billion ($1 billion) writedown on the U.S. business. RBC Bank suffered losses due to impaired loans from homebuilders and other business clients during the U.S. subprime meltdown and financial crisis.

During restructuring, Royal Bank cut more than 1,000 jobs, replaced management, reduced ties to real estate and pared commercial lending.

“They’ll have the discomfort of a little bit of a loss on the sale” of RBC Bank, said Routledge, who rates the bank “sector perform.”

--Editor: Steve Dickson

To contact the reporters on this story: Zachary Mider in New York at zmider1@bloomberg.net; Doug Alexander in Toronto at dalexander3@bloomberg.net; Laura Marcinek in New York at lmarcinek3@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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