RBC eyed Ally Canada from the get-go

Share

RBC couldn't get its hands on ING Bank of Canada this summer, but chief executive officer Gord Nixon said that's no problem because the Canadian arm of Ally Financial is "the one that we really wanted."

To win the auction, RBC had to offer a net purchase price of $1.4-billion.

RBC already has an auto lending business, but Dave McKay, RBC's head of Canadian banking, acknowledged on a conference call that his bank's market share was "solid number two or three" with receivables worth $14-billion. By adding $9-billion of receivables from Ally, RBC will become the leading auto lender in Canada.

Combined with Ally's receivables, the business will post a return on equity in the "high single digits," according to Mr. McKay. However, this figure doesn't include any benefits from cross-selling products between auto leasing clients and RBC's regular banking divisions, so it could shoot higher.

In buying Ally, RBC says it doesn't have to worry much about loan losses because auto lending "has been a very attractive, stable ROE business for us," Mr. McKay said. Expected loan losses are in the range of 20-to-25 basis points.

However, RBC will have some competition because General Motors Inc. has been very vocal about ramping up auto lending in Canada, targeting clients who are near prime, or sub prime.

Mr. McKay said he isn't that worried, though, because margins in the business are already strong – he wouldn't specify a number – and GM won't be that big of a player, at least not to start. "It shouldn't drastically alter the price landscape," he said.

RBC also noted that there will be a chance to improve its cost of funding, allowing it to make better spreads on the loans. Currently, Ally's funding is sourced through the U.S. parent, which doesn't have a credit quality as favourable as RBC's. In other words, Royal Bank will likely be able to borrow for cheaper but still charge the same interest rates when it loans this money out.

In total, RBC is paying a cash consideration of between $3.1-billion and $3.8-billion. The figure varies so wildly because the total amount will depend on a dividend that Ally will take out before the deal closes. According to RBC, the dividend will be between $250-million and $900-million.