Bloomberg News

RBC May Use U.S. Proceeds on Wealth Management, Nixon Says

June 20, 2011

(Updates with closing share prices.)

June 20 (Bloomberg) -- Royal Bank of Canada may use proceeds from the $3.62 billion sale of its money-losing U.S. consumer bank to expand in global asset management, Chief Executive Officer Gord Nixon said.

Canada’s largest lender may also use the cash from the sale of the unit and credit-card assets to PNC Financial Services Group Inc. for share buybacks, dividends and organic growth, Nixon said in a conference call today with analysts.

“We feel confident that we will have the flexibility to invest, when most banks will be de-investing because they have to build up capital,” Nixon said. “Our priority is to fill out our global wealth-management platform.”

Royal Bank agreed to sell RBC Bank USA to PNC after the Raleigh, North Carolina-based business had 11 straight quarterly losses, according to filings with the Federal Deposit Insurance Corp. The unit’s losses were equal to 6 Canadian cents a share in the first half of the year, Chief Financial Officer Janice Fukakusa said on the call.

Royal Bank has spent about $4.6 billion buying a network of U.S. consumer banks over the past decade, beginning with its 2001 takeover of Centura Banks. RBC Bank has posted annual losses totaling almost $3.1 billion since 2007, according to FDIC filings.

“This is a very good price for Royal,” said Sumit Malhotra, a Toronto-based analyst at Macquarie Group Ltd. “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.”

Takes Loss

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

Royal Bank will post a loss of C$1.6 billion ($1.6 billion) on the sale this quarter, including a C$1.3 billion writedown. Pittsburgh-based PNC is paying 0.97 times book value for the consumer lender and its 424 branches.

RBC Bank was “challenged from day one,” and lacked the size to compete with other U.S. lenders, Nixon said. The bank needed to make a large acquisition to be competitive.

“Size and scale and quality are extremely important when going into a new market,” Nixon said. “When you look at the prices of potential large acquisitions in that marketplace, our belief is we can deploy capital elsewhere in our business at significantly higher rates of return.”

RBC plans to spread the cash from the sale of the U.S. unit across its business, which operates in 58 countries.

‘Liberated Capital’

“I don’t want people to think we’ve liberated this capital and we’re going to turn around and immediately invest it in wealth management in the U.S or Asia,” Nixon said. “All of our businesses have various capital-growth plans, as well as looking at opportunities to invest in businesses or in acquisitions.”

The sale of RBC Bank helps put Toronto-based Royal Bank at an advantage compared with other banks as new international capital requirements force lenders to sell assets to build up cash, Nixon said. PNC has the option to pay as much as $1 billion of the purchase price in stock.

RBC Bank was expected to fetch as much as $3.7 billion, according to Peter Routledge, an analyst at National Bank Financial. JPMorgan Chase & Co. advised on the sale.

“We view the transaction as a fairly positive and should be accretive to earnings, reducing the headwinds and negative impact that the U.S. retail banking operations has represented to the overall bank,” said John Aiken, a bank analyst at Barclays Capital in Toronto.

Cash on Hand

RBC had C$8.95 billion of cash on its balance sheet on April 30. The sale will increase 2012 earnings by 10 cents a share, the bank said.

The bank will continue to operate some services in the U.S. and may make another purchase in the country if it offers “reasonable” rates of return, Nixon said.

The Canadian bank says it’s the fifth-largest U.S. advisory firm with $220 billion in assets under administration and 4,700 asset-management employees. The U.S. also accounts for more than 40 percent of revenue and staffing at the RBC Capital Markets investment bank, according to bank figures.

--With assistance from Laura Marcinek in New York and Sean B. Pasternak in Toronto. Editor: David Scanlan, William Ahearn

To contact the reporter on this story: Matt Walcoff in Toronto at Mwalcoff1@bloomberg.net

To contact the editors responsible for this story:


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