Royal Bank of Canada keeps its powder dry in pricey U.S. market

Royal Bank of Canada keeps its powder dry in pricey U.S. market


The head of Royal Bank of Canada said Friday that the lender is still eyeing possible acquisitions in the United States, but that prices remain too high in the wake of a massive merger that was recently announced south of the border.

Big Canadian banks like RBC have been expanding their operations in the U.S. in recent years, and the approximately US$66-billion deal unveiled on Feb. 7 to combine SunTrust Banks Inc. and BB&T Corp. renewed interest in possible M&A activity among lenders.

RBC Capital Markets had acted as financial advisor to Winston-Salem, N.C.-based BB&T for the transaction. However, Royal Bank president and CEO Dave McKay said during a conference call Friday that his bank has already been investing in commercial and private bankers in the U.S., as well as opening offices in cities such as Boston, Washington and Nashville.

McKay also said the bank has received “very strong performance” year-over-year from Los Angeles-based City National Bank, which was bought by RBC in 2015.

“We continue to look at the marketplace to see if we can grow geographically through an acquisition of a bank that would have a cultural fit, that would have obviously a similar segment approach to what we’re doing,” McKay said, before adding that they are looking to ensure they earn a return on investor money.

We’ve got a great franchise that can grow organically at double digits

“Prices are still high. And we look at the synergy playbook … and we continue to think, but we’ve got a great franchise that can grow organically at double digits, which it will continue to do with the investment that we’ve had.”

After the BB&T-SunTrust deal was announced, Toronto-based ETF manager Hamilton Capital Partners predicted a similar “merger-of-equals” (MOE) was unlikely for Canadian banks.

“For obvious reasons, Canadian banks cannot participate in MOE transactions, meaning any acquisitions they make will necessarily involve paying the target shareholders takeover premiums,” said the firm, which offers a Canadian bank ETF.

Hamilton Capital said on its website that RBC had the lowest U.S. bank acquisition risk, as “the idiosyncratic nature of City National (ultra-wealthy clientele, targeted customer base) makes it less vulnerable to further market concentration.”

RBC reported its latest financial results on Friday as well, which showed the bank was not immune to the volatility that struck markets late in 2018.

The bank was the first of Canada’s big banks to report this earnings season, with RBC saying it recorded a profit of $3.17 billion for the three months ended Jan. 31, up five per cent from a year ago. The bank’s adjusted earnings per share matched analyst expectations at $2.19.

Revenue rose seven per cent year-over-year to a record $11.6 billion. RBC also announced it was hiking its quarterly dividend by four cents, to $1.02 per share.

The bank said its results reflected “solid” earnings growth in its personal and commercial banking business, as well as its insurance operations. However, results were either flat or lower for its wealth management, capital markets and investor and treasury services businesses.

“Our strategy and unwavering focus on delivering value for our clients and shareholders continues to underpin our ability to consistently deliver solid results, even against a challenging market backdrop,” McKay said in a release.

RBC’s provision for credit losses jumped to $514 million for the quarter ended Jan. 31, up from $334 million a year ago, with McKay noting that the bank had had a “fallen angel” in the utilities sector.

While McKay did not name the company, the timing of the hit coincided with the period that saw San Francisco, Calif.-based PG&E Corp. file for bankruptcy protection. PG&E had obtained a US$350-million loan from RBC and two Japanese banks last April.

“Overall, we view our credit position as strong,” McKay said.

CIBC Capital Markets analyst Robert Sedran said RBC’s results were “good overall” considering the environment, but still in line with expectations.

“Overall, the volatility this quarter seems to have created a fair bit of volatility against our estimates as well, some positive and some negative,” Sedran wrote in a note. “The higher loan losses do not appear to be systemic, as underlying delinquency trends remain stable, and we expect market-sensitive areas to settle back down somewhat.”

• Email:[email protected]| Twitter:GeoffZochodne

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