Royal Bank of Canada's troubled U.S. retail bank, reportedly for sale, would be a plausible acquisition for a half-dozen institutions — half of them domestic, the others foreign.
Their strategic rationales for doing a deal would vary, analysts said. Spain's Banco Bilbao Vizcaya Argentaria, BB&T Bank Corp, of Winston Salem, N.C., and Toronto-Dominion Bank already have branches in RBC Bank's six-state footprint in the South. So their conceivable motivation for buying the unit would be to build on existing market share while saving money by closing redundant locations.
The other three logical suitors — U.S. Bancorp of Minneapolis, PNC Financial Services Group Inc. of Pittsburgh, and Banco Santander SA of Spain — have no significant branch presence in the South. So the play for them would be getting a toehold in a market with good long-term prospects but lots of near-term problems, analysts said.
All six institutions have expressed interest in buying other banks. And all of them have the financial strength to purchase the $28 billion-asset RBC Bank, which has been a constant headache for its Toronto parent for ten years.
"The issue that large properties have is there are fewer potential buyers," said Jeff Davis, an analyst with Guggenheim Securities LLC. "Here you have a situation where it looks like you have three to six legitimate buyers."
Wire services reported Tuesday that Royal Bank of Canada had hired JPMorgan Chase & Co. to shop the division, which has struggled with big losses on bad business property loans all over the South.
Dorsey Landis, a spokeswoman for RBC Bank, said its policy is not to discuss "speculation or rumors." Royal Bank of Canada, she said by email, "continues to make significant investment in RBC Bank, and thanks to this investment, we are undergoing a large transformation to build capabilities and improve efficiencies. … RBC remains committed to its U.S. growth strategy and our number one priority is to ensure we return to sustained profitability."
JPMorgan Chase also declined to comment.
RBC Bank has about $15 billion in real estate loans and some $8 billion in homebuilder, land development and business property mortgages, according to regulatory filings. Problems in those portfolios drove the bulk of its more than $500 million in loan losses in 2010.
Buying the 420-branch operation, based in Raleigh, N.C., would probably entail a large, costly writedown on bad loans still on the books. So any buyer would have to be prepared to withstand a big loss up front — and to take the risk of further losses if the economy doesn't turn around.
Another issue is culture. RBC Bank relies heavily on commercial real estate, a market that's still depressed and probably will stay that way for a while. Most banks are hitching their fortunes to commercial and industrial lending, which has always been a smaller part of RBC's business. Any buyer would have to figure out how to make RBC Bank evolve from a CRE lender into a C&I lender. That's a challenge Royal Bank of Canada couldn't figure out how to pull off since it began expanding in the U.S. in 2001. Finding someone willing to take on the burden of picking up where Royal Bank left off will come down to price, experts say.
It would be an expansion play for PNC and U.S. Bancorp, two acquisitive banks with ambitions of becoming national players. PNC recently bought a handful of branches in Florida, where it has a modest presence. U.S. Bancorp isn't in the Southeast yet but would like to be. Santander owns Sovereign Bank, of Wyomissing, Pa., which has branches in the Northeast and Mid-Atlantic. So acquiring RBC Bank would make it a player along the entire East Coast.
For BB&T, acquiring RBC Bank would enable it to build scale outside its home state of North Carolina. RBC Bank would present similar opportunities for BBVA, which owns BBVA Compass, in Birmingham, Ala., and for Toronto-Dominion, which bought South Financial Group Inc. in Greenville, S.C., last year — a deal that extended the reach of its U.S. franchise TD Bank from Maine to Florida.
Royal Bank of Canada has been trying to turn around RBC Bank for at least two years. The company's chief executive, Gordon Nixon, first fanned market rumours that it would sell the unit more than a year ago, saying it would explore all options for the business. Two of Royal Bank of Canada's immediate rivals, Toronto-Dominion and Bank of Montreal, have been getting bigger in the U.S. by doing deals, putting pressure on Royal Bank of Canada to either sell its U.S. arm or invest in more acquisitions.
Last week, Royal Bank of Canada's chief financial officer, Janice R. Fukakusa, said during a conference appearance that the company was still "trying to fix [RBC Bank] into being a break-even to profitable" so that it could look "closely at what our retail banking strategy is in the U.S. and whether that would involve bulking up."
Asked about whether the company would consider selling it, she said: "I don't see anything, unless there's some compelling reason to."
