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Exteriors of the new Regent Park RBC branch in Toronto, Ont. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
Exteriors of the new Regent Park RBC branch in Toronto, Ont. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

RBC's U.S. path turned out to be in the wrong direction Add to ...

Royal Bank of Canada is a profit powerhouse north of the border, but its U.S. retail and commercial division has proven to be a major disappointment for Canada's biggest bank. After a decade of challenges, the unit is said to be on the chopping block.

But that doesn't mean the entire U.S. market is a failure for Canadian banks.

No one proves that better than Toronto-Dominion Bank. Even in the depths of the financial crisis, the U.S. operation churned out strong profits, boasting a full-year profit of just under $1-billion in 2010. In December, Bank of Montreal plunged into the U.S. market with its $4.1-billion (U.S.) acquisition of the Midwest's Marshall and Illsley Bank.

Analysts say RBC and TD employed sharply different approaches in their U.S. forays. Chiefly, RBC viewed its U.S. operation as a portfolio investment, while TD devoted itself to making the U.S. division work.

At TD, "the management team put their credibility on the line and made an all-in investment," said National Bank Financial analyst Peter Routledge. "They were either going to be hailed as successful investors and managers or ridiculed as failures."

RBC's strategy was much more piecemeal. After buying North Carolina-based Centura for $2.2-billion in 2001, the bank tacked on a few smaller deals, and then added on Alabama National Bancorporation for $1.6-billion in 2007. Neither acquisition was huge. In contrast, TD bought its first majority stake in Banknorth for $3.8-billion and later purchased Commerce Bank for $8.5-billion in shares and cash.

As for assets, unlike RBC's venerable Canadian retail network, Centura catered more to commercial banking than retail banking, and it was more rural than it was urban.

"RBC bought a rural bank, run by, until very recently, rural bankers," Mr. Routledge said. For TD, however, Commerce Bank could be found in urban and affluent suburban areas. Travel to Cape Cod today and colonial style TD Bank branches are seen situated behind manicured lawns.

More importantly, RBC's U.S. banks had a history of lending to commercial real estate and construction firms. Thirty-six per cent of Alabama National's loan portfolio was in real estate construction, with a further 28 per cent in commercial mortgages. When the market crashed, RBC had to inject $3-billion to $4-billion into RBC Bank USA, which holds all of its U.S. retail assets. "It wouldn't have survived if it wasn't for RBC, so it was that weak of a franchise," Mr. Routledge said.

That RBC is pondering a possible sale of its U.S. retail bank, or a vend-in deal, has surprised few people. RBC's U.S. assets, combined with all other international assets, are worth just 8 per cent of the bank's total balance sheet. Contrarily, TD's U.S. assets alone comprise 19 per cent of the bank's total.

BMO has adopted TD's model and decided to go all-in in the U.S. Midwest. BMO already had retail operations in the region through Harris Bank, but that operation suffered three years of losses during the crisis.

Not only has BMO devoted the resources to make this deal work, but it also stole another play from TD's book and bought quality deposits. Although M&I got into trouble with real estate loans in Arizona and Florida, BMO completely stripped them out of the purchase price.

But the all-in strategy comes at a price. "If M&I works, then [BMO's management team]will be hailed as great conquerors." If it fails, however, it will be more than "an inconvenient sale of a portfolio asset," Mr. Routledge said.

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