It's been a difficult year for the U.S. regional banking sector generally, but especially for Los Angeles-based City National Bank, which has been particularly hard hit by rising deposit costs.
The $96.4 billion-asset bank — long known as the "bank to the stars" because of its extensive Hollywood connections — has a larger focus on commercial and wealth management clients than other midsize banks that have also been facing deposit pressure.
As City National's sophisticated depositors sought higher interest rates, the share of its deposits that pay interest rose from 56.3% at the end of last year to 62.1% six months later.
City National's Toronto-based parent company, Royal Bank of Canada, is now facing pressure to cut costs substantially, particularly after the U.S.-based subsidiary
On Thursday, City National announced an infusion of new leadership, saying that Greg Carmichael, the former CEO of Fifth Third Bancorp, will become the executive chair of its board of directors.
Carmichael,
Carmichael will report directly to RBC Chief Executive Dave McKay, and City National CEO Kelly Coffey will in turn report to Carmichael. Coffey has been with City National since 2019, after previously serving as the chief executive officer of JPMorgan Chase's U.S. private bank.
City National did not make Carmichael available for an interview on Thursday — he is scheduled to join the company's board on Oct. 2 — but recent comments by RBC executives and analysts who cover the bank underscore the challenges that he will face.
Nadine Ahn, RBC's chief financial officer, said at an industry conference this week that City National did not previously prioritize building its U.S. deposit franchise, as RBC did in Canada.
That approach became a problem after interest rates started rising last year, and in the wake of the failures of two California-based regional banks.
Ahn said that there's now a focus on building City National's deposit base.
"But it's a hard slog for deposits in the U.S.," Ahn said. "You have seen liquidity come out of the system to a greater extent than you have in Canada. And the pressure that's putting on the ability to extend credit is quite substantial. You're seeing banks sell off loan portfolios."
Ebrahim Poonawala, an analyst at Bank of America Securities who covers RBC, said that City National was hurt in its most recent quarter not only by higher deposit costs, but also larger provisions for credit losses and rising expenses.
"The confluence of those three made it worse," he said in an interview before Carmichael's hiring was announced. RBC executives have said that they will be discussing a more ambitious expense-reduction program during the current quarter.
Nigel D'Souza, who covers RBC as an analyst for Veritas Investment Research, said that City National's recent troubles are largely symptomatic of the broader struggles of the U.S. regional banking sector.
"City National has to offer attractive rates on its interest-bearing deposits. And that's what's driving higher interest costs," D'Souza said in a recent interview. "And that's what's in turn putting pressure on the interest margin and hurting the top line at City National."
He said that what began as a liquidity problem in the spring has turned into a profitability issue. "And it's also further magnified by banks having to pull back on loan growth in order to shore up liquidity," D'Souza said.
In 2015, RBC paid more than $5 billion to purchase City National, which had previously operated independently.
D'Souza thinks RBC should sell its Southern California-based unit and focus on banking in Canada, as well as its wealth management and capital markets divisions, all of which he described as businesses that generate higher returns on equity and carry lower risk.
But D'Souza also said that a sale appears to be unlikely, since it will be difficult for RBC to fetch a price for City National that it views as fair.
"I think you're not going to see them exit the U.S.," he said. "But I think you're going to see them emphasize growth in areas other than U.S. banking."
In a statement, an RBC spokesperson said that City National is part of the Canadian bank's long-term growth strategy in the United States, which the spokesperson described as RBC's "second home market."
McKay, RBC's chief executive officer, has also spoken recently about its commitment to City National Bank, in addition to the parent company's U.S. wealth management and capital markets businesses.
"The diversification of our business in the U.S. is really important. We've got three fantastic client franchises," McKay said last week in remarks at the Scotiabank Financial Summit in Toronto.
He also said that RBC "still sees enormous opportunity for the City National franchise."
