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RBC’s ‘Hodgepodge’ U.S. Retail Bank May Fetch $3.7 Billion

Royal Bank of Canada, Canada’s largest lender, may get as much as $3.7 billion in the sale of its U.S. consumer bank, a fraction of what it invested in the money-losing business, analysts said.

Royal Bank may sell its RBC Bank unit for about $2 billion to $2.5 billion, said Mario Mendonca, a bank analyst at Canaccord Genuity. Peter Routledge, an analyst at National Bank Financial, said the bank may raise between $2.8 billion and $3.7 billion, based on recent asset sales.

Royal Bank is getting advice from JPMorgan Chase & Co. on a possible sale of the consumer bank, which contributed to 10 straight quarterly losses at the lender’s international unit, said three people familiar with the talks.

“I don’t think a buyer would look at it and say this is a great asset,” Mendonca said in an interview yesterday. RBC Bank is “a bit of a hodgepodge of businesses that were purchased over several years.”

Royal Bank, which spent at least $4.6 billion in the past decade to buy consumer lenders in the U.S. Southeast, is retreating from the market after failed real estate and commercial loans and a slowdown in consumer lending led to losses and writedowns.

Royal Bank’s efforts to seek buyers for the Raleigh, North Carolina-based unit signals an end to a decade-long effort by the Canadian bank to make inroads in U.S. consumer lending.


“It’s a black eye,” said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier Inc., a Toronto investment firm. “No one ever questioned the stability or financial viability of Royal Bank in general. It’s a misstep rather than a mortal error.”

Royal Bank rose 16 cents to C$60.45 at 4 p.m. on the Toronto Stock Exchange. The stock, the best performer among Canada’s banks, has risen about 16 percent this year.

The proposed sale contrasts with Toronto-Dominion Bank and Bank of Montreal, which are adding to their U.S. consumer-banking businesses. Toronto-Dominion, Canada’s second-largest bank, spent more than $25 billion to expand in the U.S., including the purchase of Chrysler Financial Corp., which closed April 1. Bank of Montreal agreed in December to pay $4.1 billion for Marshall & Ilsley Corp. in Wisconsin.

Royal Bank may post a loss of 35 cents to 70 cents a share on the sale of its U.S. consumer bank, BMO Capital Markets analyst John Reucassel said in a note to clients yesterday.

Loss from Sale

National Bank’s Routledge said the unit sale may result in a loss of between $181 million and $750 million, according to a research note yesterday.

Buyers paid a median 1.1 times book value for U.S. banks and thrifts over the past three years, according to data compiled by Bloomberg on 86 transactions. Based on that multiple and RBC Bank’s equity capital of $4 billion, the bank would be worth about $4.4 billion. Some money-losing banks fetched far less. Wachovia Corp.’s sale to Wells Fargo & Co. in 2008 was worth about 37 percent of book value, the data show.

Royal Bank may also retain part of its stake in the U.S. business, working with another company, said analysts including Michael Goldberg at Desjardins Securities.

“There’s a world of difference between selling it outright and taking an interest in a bank that acquires it,” said Robert Wessel, managing director at Toronto-based hedge fund Hamilton Capital Partners Inc. “One gives you the optionality to make decisions as the sector evolves over the next few years, and one is more definitive.”

Impaired Loans

Royal Bank took a C$1 billion ($1 billion) writedown on the U.S. business in April 2009 after it posted losses on impaired loans from homebuilders and other business clients during the U.S. subprime-mortgage meltdown.

Royal Bank cut more than 1,000 jobs, replaced management, reduced ties to real estate and pared commercial lending to restore profit at the bank, which has more than 420 branches in states such as Alabama, Florida, Georgia, the Carolinas and Virginia.

Royal Bank’s international-banking unit, which includes RBC Bank, had 10 consecutive quarterly losses before returning to profitability in the first fiscal quarter of 2011, according to financial statements. RBC Bank “was still slightly unprofitable” in that period, Chief Executive Officer Gordon Nixon said at the March 3 annual meeting.

RBC Bank posted an annual loss of $629.3 million in 2007, which widened to a $1.22 billion loss in 2008, according to Federal Deposit Insurance Corp. filings. Losses narrowed to $854.9 million in 2009 and a $392.6 million loss last year.

Smallest U.S. Operation

RBC Bank is the smallest of Royal Bank’s U.S. operations, which also include wealth management and RBC Capital Markets investment bank.

Katherine Gay, a Royal Bank spokeswoman, said the lender remains committed to its U.S. growth strategy. She declined further comment.

Royal Bank turned to the U.S. after the Canadian government blocked its proposed combination with Bank of Montreal in 1998. Royal Bank agreed to buy Centura Banks for about $2.16 billion in 2001, and followed up a year later with Eagle Bancshares Inc. and Admiralty Bancorp Inc.

Royal Bank had missteps in the U.S. within three years of buying Centura. The U.S. lender became a drag on Royal Bank’s profit due to slowing loan growth and falling mortgage revenue. Nixon fired more than 150 people, closed 11 branches and replaced six top executives in 2004 to revive the business as he halted U.S. expansion.

RBC Mortgage

A year later, Royal Bank agreed to sell its RBC Mortgage unit to New Century Financial Corp. and U.S. profit rebounded in the first quarter of 2005.

Royal Bank resumed U.S. takeovers in 2006 with a purchase of Atlanta-based Flag Financial Corp. The company’s last U.S. retail bank acquisition was the $1.6 billion takeover of Alabama National BanCorporation in February 2008.

“The experience from Canadian banks is you either go big or go home when it comes to the U.S.,” said Barry Schwartz, who helps oversee C$400 million, including Royal Bank shares for Baskin Financial Services in Toronto. “You cannot go into the U.S. and do it piecemeal.”

A sale of RBC Bank would follow divestitures of other U.S. businesses. Royal Bank exited its U.S. life- and health-insurance business in October when it sold Liberty Life Insurance for $628 million. The bank reported a C$116 million loss on that sale.

Potential buyers for the consumer unit may include U.S. Bancorp, PNC Financial Services Group Inc. and BB&T Corp., according to Pri de Silva, an analyst at CreditSights Inc.

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