S&P cuts Royal Bank U.S. unit's rating

You've heard about Royal Bank of Canada's troubles in the United States before ( RBC’s U.S. path turned out to be in the wrong direction and RBC fields offers for U.S. retail business) . Now, Standard & Poor's is taking note as well.

The agency is lowering the credit rating on Royal Bank's U.S. subsidiary, RBC Bank, to BBB from A-. That's one notch above junk.

S&P also put a negative outlook on the rating, which "reflects the bank's elevated asset quality problems, which we believe will continue to negatively affect operating performance for the foreseeable future (albeit at a slower pace than in the recent past)," credit analyst Foster Cheng said.

"Although we believe the bank's capital adequacy is strong, we could lower the ratings further if RBC Bank's Standard & Poor's risk-adjusted capital ratio were to fall below 7 per cent and was not remedied with requisite capital injections from its parent."

This comes as the Wall Street Journal details RBC Bank's woes: "For sale: lots of bad loans, 430 bank branches in many second-tier cities and a tendency to lose money."

The unit is likely to sell for $3-billion (U.S.), and the most logical buyer is BB&T , which is based in Winston-Salem, N.C., the newspaper says, citing unnamed people familiar with the situation.

S&P's Mr. Cheng also notes that the U.S. unit is not a strategically important holding for Royal Bank, citing "the very competitive U.S. banking landscape and RBC Bank's small regional presence."

The subsidiary has faced intense competitive pressure, lacks size and scale, and has struggled to make a significant earnings contribution, he said. It has also suffered significant financial losses over the past few years, initiated by a sharp deterioration in the U.S. housing market.