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RBC eyes rest of Dexia's Canadian operations

A man walks past Belgian-French financial services group Dexia headquarters in Brussels October 10, 2011.


Royal Bank of Canada is launching an effort to buy out Dexia SA's half of RBC Dexia Investor Services at a time when the European bank is under intense pressure to sell assets.

The troubled Franco-Belgian bank is jettisoning properties to stabilize operations as it receives bailout funding from governments in Luxembourg, Belgium and France.

The RBC-Dexia partnership was able to make tidy, low-risk profits when times were good. But the business, which provides institutional investors with services such as pension administration and securities lending, has seen its profits fall sharply in the past two years amid slumping markets and economic turmoil. That has driven down the value of the partnership at a time when Dexia, engulfed by the European banking crisis, could be considered a distressed seller.

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But reaching an agreement on a price for Dexia's 50-per-cent stake will not be easy. Estimates of how much the assets are worth range from about $400-million to as much as $800-million.

An official with the Luxembourg government said this week that RBC has signalled it intends to exercise its right of first refusal to buy the 50 per cent of the joint venture it does not own.

Dexia entered into the partnership with RBC in 2005. Though it does not manage most of its funds directly, the partnership acts as a custodian bank for $2.8-trillion worth of assets, earning lending fees while also overseeing the movements of those investments.

The joint venture contributed $29-million to RBC's profit in 2010, down from $34-million in 2009. Macquarie Securities analyst Sumit Malhotra said those profits have likely fallen much further in 2011.

That could make it difficult to pinpoint a price tag for the acquisition. Mr. Malhotra figures it could be more than $500-million, and even higher if it is valued on performance prior to the downturn.

RBC would not comment. However, Luxembourg's Finance Minister Luc Frieden told a press conference in the country's capital city that discussions are progressing.

"Talks are taking place between Dexia and RBC in view of a takeover of that stake by RBC," Mr. Frieden said. "These negotiations are at a very advanced stage."

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Dexia, considered the first casualty of this year's European banking crisis, agreed to a bailout by France, Belgium and Luxembourg this weekend that will see its retail banking operations nationalized in Belgium in exchange for €4-billion ($5.6-billion).

Under the plan, Dexia also receives up to €90-billion in state guarantees for additional funds, if needed, over the next decade. Belgium is providing 60.5 per cent of the guarantees, France 36.5 per cent and Luxembourg 3 per cent.

As the situation at Dexia grew more unstable over the past few weeks, analysts expected RBC would move to buy out the partnership. It is among Dexia's collection of so-called "good assets" that are being sold to raise capital.

"The RBC-Dexia joint venture is profitable and so it's not a risk for [RBC]" CIBC World Markets analyst Robert Sedran said last week. "It's a capital-light business that makes money."

Canaccord Genuity analyst Mario Mendonca said profits at the business have been hit hard by lower interest rates.

"The joint venture is not as profitable as it used to be, primarily because interest rates have declined," Mr. Mendonca said.

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Dexia is selling off large portions of its business, including its Banque Internationale Luxembourg (BIL) operations, which will be acquired by a group of investors that includes the Qatari royal family.

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