In 15 years Royal Bank of Scotland Group PLC has infiltrated the U.S. retail banking market with nearly two dozen small-bank deals done through its U.S. unit, Citizens Financial Group Inc.
Now the world's 10th-largest banking company wants to take the community-banking model that Citizens has used to grow in New England and bring it to the Midwest.
In September, Citizens entered Michigan, Ohio, Indiana, and Illinois by completing its biggest acquisition to date, for Cleveland's Charter One Financial Inc.
Royal Bank has been the most active foreign acquirer in the United States by far. It has targeted slower-growth markets that appear ripe for consolidation, and it has continued to expand here while other foreign banks have retrenched or retreated. Today 25% of its pretax earnings come from U.S. operations, including Citizens and several smaller businesses, and observers agree that Royal Bank owes part of its success to letting its U.S. management team set its own strategies and make decisions locally.
Executives of the Providence, R.I., unit, who speak for themselves when discussing U.S. strategy, say they intend to keep building, but not necessarily to keep buying.
"We do not define ourselves as an acquisition company," Thomas Hollister, now its vice chairman in charge of the Midwest, said in a telephone interview Tuesday. "We try to be a great bank for our customers, and if we do that well, acquisition opportunities will naturally arise."
Citizens executives and their superiors in Scotland have said recently that the pace of U.S. acquisitions will probably slow in the coming years, after a torrent of deals in the late 1990s.
"Just in the Midwest, my colleagues and I can happily be at this for several years working with de novo branch expansion and [offering] small-business and commercial banking to the market," Mr. Hollister said.
Royal Bank paid $10.5 billion cash for Charter One and is combining its platform with Citizens' to have one common platform in the United States. The integration of the two banking systems is expected to be completed by mid-2005.
Citizens was a $3 billion-asset provincial Rhode Island bank when Royal Bank came knocking in 1988. With the addition of Charter One, it has become a $134 billion-asset company with operations in 13 states and net income of $690 million in the third quarter.
A weak dollar relative to the euro would seemingly tempt a company to make more purchases in the United States, but Royal Bank executives said their strategy is to think longer-term. "Our strategy hasn't changed at all," a spokeswoman for the Edinburgh company said in a telephone interview.
Royal Bank's U.S. deals have been consumer-driven; it has pursued deposit-taking businesses with a low level of exposure to lending (and thus, less risk of a blowup). Charter One, which was a thrift company until it converted its charter last year, still focuses heavily on retail banking, and it is based in markets considered less "hot" than others.
"We like the geography we are in" and probably will not move into Texas, Florida, or California, the spokeswoman said.
In addition to buying banks in New England, Citizens bought Mellon Financial Corp.'s small-business and retail banking business in December 2001. The $2.1 billion purchase brought Citizens into the Middle Atlantic states.
Royal Bank has also been active in buying nonbanking businesses such as credit card operations and technology vendors. In August it said it was buying Lynk Systems Inc., a privately owned Atlanta merchant acquirer and payment transaction processor, for $525 million in cash. In March, Royal Bank bought the credit card business of People's Bank of Bridgeport, Conn., for $360 million.
Jim Ackor, an analyst with Royal Bank of Canada's RBC Capital Markets, said Royal Bank of Scotland follows a pretty basic growth strategy but might have run out of steam if it had not moved beyond New England for deals.
"If you look at the track record that Citizens Financial has established, it is one of rapid growth by acquisition," he said. In New England, consolidation in the industry has probably entered the seventh or eighth inning, and potential targets are fewer than they were even five years ago, he said.
"They have put themselves in a position whereby they have an opportunity to replicate their New England strategy with a very well-established base in the form of Charter One," Mr. Ackor said.
Royal Bank is taking advantage of the Charter One integration to introduce its corporate logo to the U.S. market. Citizens will retain its name (and in some markets, so will Charter One), but the Citizens 'C' logo will be replaced with Royal Bank's logo of four arrows pointing toward the center. (Citizens will retain its signature green corporate color.)
The new logo will be introduced in Ohio, Illinois, Indiana, and Michigan this month and in New England and the Middle Atlantic beginning in March.
In the last year Royal Bank has been promoting the RBS brand in the United States both through media campaigns and marketing featuring celebrities.
Having spent billions in cash to expand in the United States, Royal Bank may not find ready investor approval for further big deals here.
Mark Thomas, an analyst with Keefe, Bruyette & Woods Inc., says he is skeptical of Royal Bank's U.S. strategy, because it will have neither the cash nor the ratings to raise enough capital for another big purchase for at least the next 12 to 18 months.
He also said he questions the strategy of a company that grows mostly by buying other companies. Citizens has never paid a dividend to Royal Bank, "so how would you value a bank which repeatedly comes to shareholders for more equity and doesn't pay any dividend?" he asked. "When you think of the amount of capital, the amount of management time and resources which have gone into the acquisitions of this group, they could perhaps have been better used elsewhere."
However, Royal Bank has been one of the more successful foreign banks in executing a U.S. strategy.
Many banks have talked about coming into the United States and doing a lot of consolidation, but Royal Bank "is really the only one that has pursued this strategy for an extended period of time in an aggressive way," Mr. Ackor said.
