Royal Bank of Canada is nearing a deal with PNC Financial Services Group Inc. for the Canadian bank's beleaguered U.S. retail banking business, according to sources familiar with the situation.
While an announcement could come as soon as Monday, there is no assurance that a final deal will materialize.
PNC, which recently said it will build "the world's most environmentally friendly skyscraper" as a new headquarters in its hometown of Pittsburgh, has about $183-billion (U.S.) in deposits, making it the seventh-largest bank in the United States.
Its network of more than 2,500 branches stretches across 15 states. RBC's U.S. retail bank, in comparison, has about $21-billion in deposits and 426 branches that are largely concentrated in the Carolinas and Alabama.
"PNC is one of the best banks in the U.S.," said Rob Wessel, managing partner at Hamilton Capital Partners Inc. PNC earned $3.4-billion last year, its highest profit to date, and has made it clear that it wants to grow as the U.S. banking business consolidates in the wake of the financial crisis. On Dec. 31, 2008, it struck a government-assisted deal to buy National City Corp. for $6.1-billion. PNC completed the integration of National City's 1,300 branches into its network last year.
In contrast, U.S. retail banking has proved to be a headache for RBC right from the start. Canada's biggest bank made its first real splash in the business a decade ago when former CEO John Cleghorn paid about $2.2-billion for North Carolina-based Centura Banks. RBC has been building the business since then, but has failed to turn it into a money-maker.
The business's troubles were compounded by the U.S. real estate crisis. As a result, RBC took a $1-billion writedown two years ago to reflect the reduction in the value of the business. This year, chief executive Gord Nixon decided to give investment bankers at JPMorgan Chase a mandate to explore an outright sale of its U.S. retail assets or a partnership with a U.S. financial institution after receiving several expressions of interest from U.S. banks.
Mr. Nixon has been signalling to the market for some time now that he no longer considers the U.S. retail banking business to be integral to RBC. A telling example: on Thursday, RBC announced that it has agreed to a five-year sponsorship of the PGA's Heritage Classic golf tournament in South Carolina, but retail banking was conspicuously absent from the press release, which stated that "as part of the five-year sponsorship deal, RBC will leverage U.S. network television opportunities to promote its wealth management, private banking and capital markets businesses to a coveted client demographic."
(A spokeswoman for the bank explained the absence by saying that "RBC's wealth management, private banking and capital markets businesses target the high net worth client base and we felt the RBC Heritage was a great vehicle to reach that client demographic.")
While the RBC name is likely to disappear from the bank's U.S. retail branches, the bank will continue to push its brand - and build its sizable business - in the U.S. by way of its capital markets and wealth management operations, which it considers to be core parts of the company.
Analysts have been expecting the Canadian bank to strike a deal with a U.S. partner to wipe its hands of its retail banking problems for some time. Options under consideration have included an outright sale of the U.S. assets or a so-called "vend-in" strategy, in which RBC would take back stock from a U.S. bank to retain an interest in the operations.
"The main benefits of a vend-in is that you keep a toe-hold in the market, thereby retaining strategic options for the future, and you also get to participate in the recovery in bank stocks," Mr. Wessel said.
Macquarie Equities Research estimated in a recent note to clients that RBC's U.S. bank would sell for between $1.9-billion and $2.3-billion.
The main rival to PNC in the bid to take control of RBC's retail operations has been BB&T Corp., the 10th-largest bank in the U.S., ranked by deposits. PNC has a market capitalization of $32-billion, while BB&T's is closer to $18-billion.
"It's kind of a different story for both of them," said Sumit Malhotra, an analyst at Macquarie Capital Markets. "For BB&T, they already have a sizable footprint in the southeast that in many ways overlaps a lot of the areas that Royal is in. Conversely, PNC outside of Florida doesn't have much in the way of a Southeast footprint, so this would really be a first step for them to grow in that region."