Friday, August 18, 2006

Moody's Boosts Rating on RBC Centura

Triangle Business Journal, Lee Weisbecker, 18 August 2006

Saying it expects further gains in profitability, New York-Based Moody's Investors Service has raised its rating on RBC Centura Bank to stable from negative.

The rating covers both the bank's $623 million in subordinated debt and $12 billion in deposits.

In a July 27 note, Gregory W. Bauer, Moody's managing director for financial institutions, says the agency's prior negative outlook stemmed from the bank's poor performance in recent years and from questions over Royal Bank of Canada's long-term commitment to its U.S. operation.

Royal Bank, Canada's largest bank with $448 billion in total assets, acquired Centura Bank in 2001 and rebranded it RBC Centura.

"Moody's believes that RBC Centura's management focus has been strengthened, with a clear strategy in place as well as enhanced systems and procedures," Bauer says. "Moreover, Moody's is convinced that direct retail and commercial banking in the U.S. is a core strategy for Royal Bank and that RBC Centura is a centerpiece of that strategy."

RBC Centura spokeswoman Kristen Doherty says the upgrade reflects "positive performance and strategic focus over the past 18 months."

"We are obviously pleased," she says.

Moody's, one the top three debt rating agencies, affirmed Centura's overall financial strength rating at "C-", meaning the bank has "acceptable financial fundamentals" and a "stable operating environment."

The agency gives Royal Bank of Canada a "B+". Moody's highest financial strength rating for banks is an "A", with its lowest being an "E".

RBC Centura's bumpiest year came in 2004 when, according to figures compiled by the Federal Deposit Insurance Corp., total assets declined to $18.4 billion, down by a little less than $1 billion from the year before, and earnings swung to a net loss of $127 million from net income of $55 million in 2003.

In 2005, total assets recovered to $20.3 billion and net income to $89 million.

Though a lion's share of Centura's 2004 troubles were pegged to a national mortgage operation that RBC folded into its U.S. banking operation, Canadian analysts, in the face of declining share prices, began to second-guess whether Royal Bank's strategy of acquiring Centura to gain a U.S. foothold had been a wise move.

Moody's latest rating report, however, is a sign that Centura's troubles are well on the way to being fixed, says analyst Steve Cawley, who covers Royal Bank for TD Newcrest.

"That would be how I interpret it," says Cawley, who does not own stock in the bank.

In its report, Moody's states that its rating of Centura is based on the "credit enhancement" the bank receives by having such a strong parent in Canada.

"Royal Bank has the capacity to support RBC Centura and the probability that it would provide that support, if needed, is high because Royal Bank would want to support its own net worth and would not want to alienate U.S. bank regulators," Bauer writes.