RBC banking on double-digit growth from newly acquired City National

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Royal Bank of Canada expects that its newly acquired City National Bank will drive double-digit profit growth in the United States as the lender expands its appeal to wealthy clients in new urban markets, but RBC remains open to additional acquisitions.

"There are significant growth opportunities for us in the United States, but we wouldn't rule out a tuck-in acquisition if it accelerated our geographic expansion or our capabilities," Dave McKay, RBC's chief executive officer, said before the bank's investor day presentation – its first since completing the $5-billion (U.S.) City National deal in November.

The purchase was RBC's largest-ever deal and marked a significant return to the United States after it sold its struggling U.S. personal and commercial banking operation in 2011.

The return has raised questions about what RBC intends to do differently this time around, and the lender emphasized two key factors: City National will remain focused on high-net-worth clients largely centred in California and New York; and RBC will take what it calls a "light touch" in integrating the two brands.

In addition, it expects that City National will benefit from rising U.S. interest rates and the use of RBC's larger balance sheet to extend larger loans to its clients.

The result, according to RBC's chief financial officer, Janice Fukakusa, will deliver an additional $350-million (Canadian) in profit for RBC in 2016, before transaction and integration costs.

By 2020, she added, City National should generate about $1-billion (U.S.) in profit, before taxes, which is more than double the L.A.-based lender's 2015 results and implies a compound annual growth rate of more than 20 per cent over five years.

The estimates rest to some extent on rising interest rates. RBC estimates that each quarter percentage point rate hike by the Federal Reserve will translate to $35-million in net interest income. With a growing loan book, Ms. Fukakusa said net interest income should rise by as much as $300-million within five years.

But RBC believes that its approach to integration will also drive its success in the United States. Though RBC has combined it U.S. wealth management unit with City National, City National's CEO, Russell Goldsmith, now leads the combined business from Los Angeles.

"The approach that was taken by the two companies has been relatively seamless," Mr. Goldsmith said at the presentation. "We have not lost any clients and we have not laid off one colleague because of this merger – quite unusual, I think, for bank mergers that people have seen in the United States."

He added that City National has already increased its work force by 200 people and expects the number of new hires to rise by 400, or 15 per cent, by the end of this year as the bank pursues a rising number of high-net-worth clients in specific urban areas.

"With a very few exceptions, we make the same decisions and I have the same authority that I had before," Mr. Goldsmith said.

Asked whether RBC would eventually impose its own brand name on City National, Mr. McKay responded that RBC has not yet developed a longer-term plan.

"City National has an incredible brand, particularly in its core market of California, that RBC doesn't have," he said.

"I would envision a dual-brand structure for the foreseeable future. There are benefits to both brands, and we have to think through how to extract the most value out of both brands."