Royal Bank of Canada, the country’s largest bank, agreed to buy the 50 percent of RBC Dexia Investor Services Ltd. it doesn’t already own from Banque Internationale a Luxembourg SA for about C$1.1 billion ($1.1 billion) in cash.
Royal Bank must revalue its investment to reflect the purchase price, resulting in a non-cash loss of about C$170 million, the Toronto-based firm said today in a statement. Most of the loss will be taken in the bank’s fiscal second quarter. Royal Bank will also have a C$30 million loss in the quarter from selling Dexia Group debt securities as part of the deal.
Royal Bank agreed to take over the RBC Dexia partnership to expand a business that provides global custody, fund and pension administration, shareholder services and treasury. The transaction follows the breakup of Dexia SA (DEXB), the Belgian bank that lost access to short-term funding during Europe’s sovereign debt crisis.
“This really puts us on a strong footing against all of the global peers that we compete with for business.” James Westlake, group head of international banking and insurance, said today in an interview. “We’re excited about the growth opportunities.”
Royal Bank said the acquisition will “moderately” add to earnings in 2013 while cutting the Tier 1 capital ratio by about 25 basis points. RBC Dexia had net income of 123 million euros ($164 million) last year.
“This should ultimately be a successful transaction, assuming that Royal is able to continue to grow the business,” John Aiken, an analyst with Barclays Capital, said today in a note. “We do not view the reduction in capital ratios as significant and believe that this is more than offset by the anticipated increase in earnings.”
Royal Bank will “get very aggressive” in expanding the business, with an “early focus” on Europe, followed by Asia and then South America, particularly Brazil, Westlake said.
“It’s really a great fit with our global growth strategy for both our wealth management business and our capital markets business,” Westlake said.
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