The Wall Street Journal, Robin Sidel & Caroline Van Hasselt, 11 May 2011
For sale: lots of bad loans, 430 bank branches in many second-tier cities and a tendency to lose money.
That is the hard truth behind Royal Bank of Canada's effort to sell its U.S. operations known as RBC Bank. The largest Canadian lender by assets has attracted prospective bidders for the business despite RBC Bank's raft of problems. The unit is expected to fetch roughly $3 billion, according to people familiar with the situation.
"There are just not a lot of banks out there to buy," said one person familiar with the process.
Tanis Robinson, a spokeswoman for RBC, declined to comment on the auction process or the bank's performance.
A sale of RBC Bank would represent a retreat from its decade-long goal to lash together a significant U.S. banking presence. On Wednesday, U.K. lender HSBC Holdings PLC is expected to unveil a strategy that also could include retrenching from certain markets such as the U.S., where it has 470 branches, some analysts said.
At the same time, RBC's rivals are charging into the U.S. market, taking advantage of low valuations in the wake of the financial crisis. The big Canadian lenders all have posted solid earnings growth since the financial crisis, and none required a taxpayer-funded bailout, as did some U.S. banks.
Bank of Montreal recently agreed to buy Marshall & Ilsley Corp., a lender in the U.S. Midwest, for roughly $4 billion. Toronto-Dominion Bank, which now has more branches in the U.S. than in Canada, recently bought auto lender Chrysler Financial Corp.
The advances and retreats have resulted in a string of deals in recent months that foreshadow more consolidation among regional and community banks. Such banks often don't have the resources to keep up with stronger banks and a raft of new regulatory requirements.
Like other regional banks, RBC Bank was hard hit by borrowers who defaulted on commercial and real-estate loans during the financial crisis. But the struggles of RBC Bank, which as a stand-alone business would rank as the 23rd largest bank by assets in the U.S. out of more than 7,600, stand out.
"Everything that could wrong did go wrong for a very weak franchise to start with," said Peter Routledge, an analyst at National Bank Financial in Toronto.
In the first quarter, RBC Bank reported that nonperforming loans, or those in which the borrower has fallen behind, represented 6.8% of total assets. BB&T Corp., which operates in overlapping markets, had a nonperforming asset ratio of 2.56%. Though the Canadian bank's international unit accounted for 8.3% of the parent company's total first-quarter revenue, the U.S. operations have lost money for four years.
Raleigh, N.C.-based RBC, which has $27 billion in assets spread across six Southeast states, first moved into the U.S. retail banking market in 2001 when it paid $2.3 billion for Centura Banks Inc., a regional lender based in Rocky Mount, N.C., that had $11.5 billion in assets and 241 branches.
That was followed by a string of smaller acquisitions in the Southeast, capped by a $1.6 billion purchase of Alabama National Bancorp in 2008, just as the housing market was starting to slump.
RBC Bank's acquisitions left the bank with a piecemeal branch network that doesn't have a dominant presence in big cities.
The bank is ranked fourth in the metropolitan statistical area, or MSA, that includes its Raleigh headquarters, with a 9.79% share of deposits, according to the Federal Deposit Insurance Corp. RBC Bank ranks fifth in North Carolina, where it has its largest presence, with a deposit market share of 4.31%, according to FDIC data.
RBC didn't fully integrate the U.S. operations after making the acquisitions, said analysts and bankers familiar with the matter. The Canadian parent, which has a reputation of strong risk management, kept a hands-off approach, letting local management handle the business, they said. RBC declined to comment.
RBC is well aware of the problems. In 2009, the corporate parent took a 1 billion Canadian dollar ($1.04 billion) write-down on the business and since then has tried to revamp the operations by cutting costs, consolidating branches and offering new financial products to customers.
"Returning this business to profitability is the key priority and once there, we'll be in a better position to determine the strategy of this business going forward," said Janice R. Fukakusa, RBC's chief administrative officer and chief financial officer, in a presentation to analysts in February.
Now, it appears the bank won't wait to fix it before selling the U.S. operations. On Tuesday, Standard & Poor's Ratings Services downgraded RBC's U.S. bank a notch to triple-B from single-A-minus. S&P said it believes RBC has "altered its long-term strategic plans for the company" and it doesn't believe the bank will be a key holding in the long term.
Analysts said the most logical buyer is BB&T, which is based in Winston-Salem, N.C. A BB&T spokeswoman declined to comment.
