Bloomberg News

PNC to Buy RBC’s U.S. Bank, Card Assets for $3.62 Billion

June 20, 2011

(Updates shares in penultimate paragraph.)

June 20 (Bloomberg) -- PNC Financial Services Group Inc., the sixth-largest U.S. bank by deposits, agreed to pay $3.62 billion in cash and stock for Royal Bank of Canada’s U.S. retail banking unit and credit-card assets.

PNC has the option to pay as much as $1 billion of the purchase price in stock, Pittsburgh-based PNC said today in a statement. The deal is expected to add to PNC’s earnings by the end of 2013 or sooner depending on how much of the transaction is paid in stock.

The acquisition will help 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 in six states across the region. RBC said the deal will result in a C$1.6 billion ($1.6 billion) loss this quarter, which includes a goodwill write-off of C$1.3 billion.

“The addition of RBC Bank provides PNC a great opportunity to enter attractive Southeast markets in a way that will create value for our shareholders,” PNC Chief Executive Officer Jim Rohr, 62, said in the statement.

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.

“There’s an appetite for acquisitions given their capitalization and the lack of organic loan growth,” Tom Lewandowski, an analyst at Edward Jones & Co. in St. Louis, said of PNC in a June 17 interview. “They’re looking to go out there and purchase that loan growth.”

Merger Costs

PNC, which is spending $165 million of the total cost on RBC’s credit-card assets, expects to incur merger costs of about $322 million, the lender said. The acquisition adds about $19 billion of deposits and $16 billion of loans based on RBC Bank’s balances as of April 30, according to the statement. The deal is expected to be completed in March 2012.

The option to pay as much as $1 billion of the purchase price in stock is the “worst-case scenario” and is dependent on regulations surrounding capital requirements, Rohr said today on a conference call with investors. If PNC doesn’t use the option, the deal will be immediately accretive to earnings.

“We’re well capitalized from a Tier 1 common point of view right now under almost any one of the scenarios that are coming out of Basel or the regulations,” Rohr said. “There’s no reason to make a decision on that today. It’s an option we have down the road to solve a potential problem that we don’t see today.”

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. Competitors Toronto-Dominion Bank and Bank of Montreal are expanding by acquiring troubled U.S. lenders.

“We certainly had a lot of the wrong assets in the wrong places at the wrong time,” Jim Westlake, who runs the international banking unit, said in an interview on Bloomberg Television. “A lot of things went bad before we had a chance to do a lot of cleanup.”

PNC has been successful with acquisitions in the past, will boost productivity and doesn’t have branch overlap in the region, Westlake said.

RBC Bank 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 the RBC Capital Markets investment bank.

‘Very Good Price’

“This is a very good price for Royal,” said Sumit Malhotra, an analyst at Macquarie Capital Markets in Toronto. “Given the continued challenges in the operating performance of RBC Bank USA and the fact that it was well-known the bank was looking to divest, for Royal Bank to get more than 20 times normalized earnings has to be seen as a win.”

Royal Bank rose 21 cents, or 0.4 percent, to C$54.54 at 4:15 p.m. in Toronto Stock Exchange trading. PNC fell $1.13, or 2 percent, to $56.66 in New York Stock Exchange composite trading.

Bank of America Corp. advised PNC on the deal, and RBC Capital Markets and JPMorgan Chase & Co. advised Royal Bank.

--With assistance from Jeffrey McCracken in New York and Douglas Alexander in Toronto. Editor: Steve Dickson

To contact the reporters on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net;


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