Fitch: RBC Acquisition of Ally Canada's Auto Finance Business Ratings
NEW YORK -- October 23, 2012
Fitch Ratings views Royal Bank of Canada's (RBC; 'AA/F1+') announced agreement
to buy the auto finance and deposit business of Ally Credit Canada Ltd. (Ally
Canada) and ResMor Trust Company, the Canadian auto finance business of Ally
Financial, Inc. ('BB-/B') as neutral to RBC's ratings. In Fitch's opinion, the
acquisition fits with RBC's Canadian consumer banking strategy and is
manageable in size, relative to RBC's overall capital base and Canadian
RBC has agreed to pay $3.1 billion to $3.8 billion in cash for Ally Canada's
auto finance origination platform and sales force, and Canadian auto finance
receivables of approximately $9 billion in the first 12 months following
closing in the first quarter 2013 (1Q'13). RBC is not acquiring leases, nor is
it acquiring any insurance assets as part of this transaction. The actual
purchase price will depend on the dividend taken by Ally Canada prior to
closing and will include $600 million of goodwill and intangibles. Excess
capital at Ally Canada decreases RBC's net investment to approximately $1.4
billion. The transaction is expected to reduce Tier 1 capital ratio (Basel II)
by approximately 60 basis points (bps) and Basel III Common Equity Tier 1
ratio by approximately 40 bps at closing, on a pro forma basis as of 3Q'12.
The transaction is expected to be accretive to earnings with expected profits
of $120 million in the first 12 months after closing and before
transaction-related costs of approximately $50 million.
This acquisition will raise RBC's Canadian auto finance receivables to
approximately $24 billion, thereby strengthening RBC's market position in line
with its leading consumer banking strategy in Canada. RBC will integrate Ally
Canada's auto finance operations into its existing Canadian banking segment to
generate operating efficiencies and cross-sell opportunities to provide full
banking services to customers and auto dealerships. Earnings could also
benefit from a shift to support future originations with RBC's comparatively
lower funding base, including its stable and cost-effective core deposits.
Overall, Canadian auto loans have performed well as an asset class through the
cycle. However, future performance warrants close monitoring considering
record levels of household debt in Canada. Furthermore, auto financing is a
competitive business as it is an attractive market for a number of lenders.
Although RBC has entered a subvention agreement with GM Canada, GM itself
could also look to increase its share of the Canadian auto financing market.
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