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Royal Bank of CanadaNATHAN DENETTE

A decade after Royal Bank of Canada ventured into the United States with ambitions to build a major North American retail bank, that strategy is now at a turning point as RBC fields offers to sell the business.

Sources close to the bank say RBC has received several expressions of interest to buy or merge its U.S. operations, prompting Canada's largest bank to start a formal sale process. RBC has retained investment bank JPMorgan Chase to explore an outright sale of the assets, or the possibility of partnering with a U.S. financial institution.

The talks began in the past two months after RBC received more than one expression of interest and the bank has since gone out to about a half-dozen potential suitors to gauge interest. However, the move does not necessarily mean RBC will sell the business, a network of retail bank branches that stretches from Florida to Alabama and North Carolina.

The U.S. banking strategy has dogged RBC chief executive officer Gordon Nixon for a decade ever since his predecessor John Cleghorn embarked on a North American expansion in early 2001, starting with the $2.3-billion acquisition of Centura Banks Inc. and its 241 branches.

At the time, that deal was the largest foreign acquisition that a Canadian bank had ever made. Mr. Nixon, who took the helm a few months later, has spent the subsequent 10 years trying to make the business work amid a unstable economy in the U.S. that has made it tough for the small network of branches to grow.

The bank now has more than 400 branches.

Despite subsequent acquisitions designed to give the business more of a presence in the southeastern states, such as the $1.6-billion takeover of Alabama National bank in September, 2007, the U.S. strategy has been a money-loser.

RBC's U.S. operations have struggled in part because the U.S. Southeast was hard hit by the real estate meltdown during the financial crisis. The bank took a $1-billion writedown on the business in mid-2009, prompting RBC to record its first quarterly loss in 15 years that summer.

Analysts and investors have grown increasingly impatient with the performance of the U.S. bank. Mr. Nixon must decide whether he wants to abandon the strategy now - at a substantial loss - or hold on for an economic recovery that could allow him to fetch a higher return later on.

Turning down a sale in favour of a merger or a vend-in deal - which would see RBC combine the assets with a U.S. player in exchange for a stake in the larger business - may allow the Canadian bank to avoid selling too soon.

"The vend-in gives you the opportunity to almost defer a decision in some ways on whether you're really committed longer term," CIBC analyst Rob Sedran said. "The cleaner solution would obviously be to sell it and just move on. But that leaves you pretty much closed to that strategy going forward."

Banks interested in the assets may include several with branch networks in the area, including U.S. Bancorp, SunTrust Banks, Regions Bank and PNC Financial. However, U.S. lenders such as SunTrust, which has long been thought of as a good candidate to merge with RBC's U.S. branches, are still facing tight capital constraints after the credit crisis.

The assets could fetch between $2-billion and $2.5-billion, but that price could fluctuate depending on what assets would be included in a sale, or what part of the business is included in a vend-in deal. The U.S. bank has about $25-billion worth of assets, but struggles to provide a significant return for RBC.

Should RBC sell, the bank would not come close to getting back the $4.6-billion it has spent trying to build a U.S. banking business. "It means they're probably going to lose money," Canaccord Genuity analyst Mario Mendonca said. "They're going to take a loss when they sell it. There's probably a lot of goodwill they'll have to write off."

Though relatively tiny compared to the bank's other operations, the U.S. banking division commands outsized attention among RBC investors because it's a blemish on the bank's strong asset base.

Last month, RBC said the division made $24-million in the first quarter, compared to a loss of $57-million a year ago. The international banking division accounts for 8.3 per cent of revenue.

"The market may not like [a vend-in] because that would only raise the potential that this bank one day is going to turn around and do a deal to buy the rest of it. And that's not what investors want to hear," Mr. Mendonca said.

The profit registered at RBC's international division last month was the first quarterly profit it had seen in nearly three years. However, when Mr. Nixon was asked at the annual meeting in March whether that meant the bank had finally turned things around, the CEO suggested it was not out of the woods yet.

"No, I think it's a sign of steady improvement," Mr. Nixon said, adding the profit was due mostly to RBC's Caribbean business and its RBC Dexia investment trust, not the operations in the southeastern U.S. which were still not profitable.

"The banking industry in the U.S. has been a low-return industry for 10 years, and the issue is, is that going to change going forward? And we're focused on trying to get back to better performance and determining that," Mr. Nixon said after the meeting in March.

Mr. Nixon also raised questions over how much money RBC was willing to put into bolstering the U.S. retail bank, when it could deploy capital elsewhere. "The big decision for us is how much do we want to invest it in U.S. retail banking or our existing retail banking business relative to other alternatives. And that's an ongoing process that we constantly look at and constantly review."

While Royal Bank has been considering options for its U.S. retail bank for a long time, the U.S. subprime mortgage crisis made it difficult to properly evaluate the alternatives. Normal merger and acquisition activity froze in recent years as the uncertainty about toxic assets in the banking system made buyers leery. Nearly all of the deals done during the crisis were forced sales, or government-assisted sales, of lenders that were on the brink. However, recent deals in the banking sector such as BMO's acquisition in the U.S. Midwest, suggest the deal market is thawing.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
CM-N
Canadian Imperial Bank of Commerce
+1.3%50.72
CM-T
Canadian Imperial Bank of Commerce
+1.13%68.67
RY-N
Royal Bank of Canada
+0.48%100.88
RY-T
Royal Bank of Canada
+0.29%136.62

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