Despite a writeoff worth $1.6-billion, analysts still see upside in Royal Bank of Canada selling its U.S. retail operations to PNC Financial for $3.62-billion (U.S.)
The loss stems from a goodwill writeoff of $1.3-billion, as well as a markdown of the bank's U.S. loan book. The total transaction value equates to about 97 per cent of RBC's tangible book value.
Yet Bay Street seems to be taking a tone of 'what's done, is done,' and analysts are looking at the future positives. For starters, earnings accretion is expected to materialize in 2012, with RBC estimating about 10 cents per share. Much of that stems from the bank ridding itself of a poor performing unit. RBC's international segment has been a sore spot in recent years, posting a net loss in 11 of last 12 quarters, noted Barclays Capital analyst John Aiken.
The bank's capital levels are also expected to improve, with the pro forma Tier 1 ratio increasing by 140 basis points and the Tier 1 common equity ratio rising by 100 basis points.
But more importantly, from a macro standpoint, RBC's management can now focus on growing its core businesses, noted CIBC World Markets analyst Rob Sedran. Plus, Mr. Sedran thinks RBC got a "very full price" for the unit, so the bank can leave it behind on a relatively happy note.
RBC did not say what it would do with the cash proceeds, which are a minimum of $2.62-billion, considering that PNC will provide RBC with a maximum of $1-billion worth of stock and the rest in cash. But Mr. Aiken speculates that the money will be put back into two of the bank's fastest growing segments.
Use of proceeds will "be most likely additional investments in capital markets and wealth management, given RBC reiterated its commitment to investment in these areas in its press release," he noted.
Through the sale, PNC will acquire a total of 424 retail branches, as well as $16-billion (U.S.) in loans and $19-billion in deposits.