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The entrance to a Royal Bank of Canada office is seen in Orlando, Fla. (John Raoux/AP)
The entrance to a Royal Bank of Canada office is seen in Orlando, Fla. (John Raoux/AP)

RBC ends foray into U.S. retail banking with sale to PNC Add to ...

When Royal Bank of Canada began shopping its U.S. retail bank this spring, it wasn’t looking to abandon the struggling business. Instead, RBC wanted to keep a hand in running the operation with a local partner.

But in the weeks that followed, the options for Canada’s largest bank quickly began to shrink.

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Several U.S. banks were interested in a partnership, RBC chief executive officer Gordon Nixon said, but it became clear that joining forces with a small bank would not solve the main problem: a lack of presence for RBC in the U.S. banking market. And if RBC were to merge operations with a larger U.S. bank, it would be forced to settle for a minority role in the combined business, tying up precious capital in an operation that might not pay off.

So RBC decided it had no other option but to become a seller. On Monday, it announced the $3.62-billion (U.S.) deal to sell its network of 424 branches to Pittsburgh-based PNC Financial Services Group .

“Everything was on the table,” Mr. Nixon said in an interview. “In the end, we reached the conclusion that building off our existing platform in the U.S. was not the right decision.”

The deal ends a decade-long experiment in U.S. personal and commercial banking for RBC. The bank has spent $4.6-billion on acquisitions in the U.S., starting in 2001 when it bought North Carolina-based Centura Bank. It was the largest foreign acquisition by a Canadian bank at the time, and RBC followed it up six years later with the purchase of Alabama National Bancorp.

But the cluster of branches RBC assembled from Florida to Virginia was too scattered, and located in mostly smaller markets, to generate strong deposit growth. It was also heavily reliant on mortgage and construction lending, which was clobbered by the U.S. financial crisis. In addition to losing more than $3-billion since 2007, RBC took a $1-billion writedown on the assets in 2009.

Mr. Nixon’s decision to seek out a sale or a partnership also came after the realization that its footprint south of the border was too small to ever make a significant return without spending further to bulk up. PNC says it can give the operations the added heft they needed to attract more customers. PNC will become the fifth-largest U.S. bank with 2,870 branches, and expects to carve $230-million worth of expenses out of the operations.

James Rohr, chief executive officer at PNC, said RBC lacked the size in the United States to be effective. “RBC has built good client relationships,” Mr. Rohr told analysts on a conference call. “But they really haven’t had the opportunity to build a strong product set.”

The price tag includes $3.45-billion for the U.S. branches, and $165-million for related credit card assets in the United States. PNC will pay a combination of cash and stock, with RBC acquiring up to $1-billion in shares in the U.S. bank as part of the deal. The sale is expected to close in March, 2012, pending regulatory approvals.

Though RBC will record a loss of $1.6-billion (Canadian) after-tax this quarter, including a $1.3-billion goodwill writeoff, the price tag was more than what most analysts were expecting the bank to fetch. Robert Sedran, an analyst with CIBC World Markets, called the selling price “robust,” noting that it will free up capital for RBC.

It is not clear how RBC intends to use the proceeds. Mr. Nixon said he doesn’t intend to do a major transaction any time soon, but noted the bank could expand its global wealth management business, or possibly its capital markets operations. RBC is also refocusing its U.S. strategy on investment banking and wealth management, where the bank employs about 8,000 people across 42 states.

Mr. Nixon had been signalling for the past year that the U.S. retail bank was no longer a strategic priority at RBC. “We’ve been challenged in that banking business from day one in terms of reasonable returns,” the CEO said. “We really have not had that strong base from which to build on and I think that would be one of the lessons learned.”

However, given the capital RBC figured it would have to allocate to expanding its U.S. footprint in order to become a significant competitor, “we just couldn’t get comfortable that those risk reward returns were going to be high enough,” Mr. Nixon said.

The deal comes at a time when RBC’s Canadian rivals are expanding in the U.S. retail banking market. Toronto-Dominion Bank purchased a collection of small Florida banks last summer, bringing its large network of U.S. branches along the East Coast to roughly 1,300, which is more than the 1,100 TD has in Canada. TD also bought the auto lending business Chrysler Financial Corp. for $6.3-billion (U.S.).

Bank of Montreal, which has branches in Illinois, announced in December it was buying Midwestern U.S. bank Marshall & Ilsley Corp. for $4.1-billion, expanding its footprint in Wisconsin, Missouri and other states. That deal is expected to close in the coming month.

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