Determined to expand internationally, Royal Bank of Canada is buying Los Angeles-based City National Corp. for $5.4-billion (U.S.), the largest deal struck by a Big Six lender since the financial crisis.
Ever since RBC's stunning pullback south of the border in 2011, when the lender sold its troubled retail banking arm, executives have wrestled with the best way to break back into the U.S. market. Underscoring the search was their necessity to add a new revenue stream – whether it was in wealth management or personal and commercial banking. Because the Canadian market is already heavily saturated, the list of expansion opportunities at home has been rather short.
"We needed a new growth platform; we needed something that we could get excited about," chief executive Dave McKay said in an interview.
What RBC settled on is a deal that adds back a retail footprint in the United States – albeit one that is focused on niche high net worth clients instead of the mass market. The deal also builds out RBC's substantial U.S. wealth management footprint, something the bank has said it is keen to grow.
Elaborating on the growth potential, Mr. McKay said a long-term goal is to expand City National's offering to London, where RBC already has a sizable wealth management footprint.
City National's managers describe their company as both a private bank and a business bank. It is best known for serving wealthy clients, particularly entrepreneurs, in major cities including New York, Los Angeles and San Francisco. The company also has deep ties to Hollywood and offers the industry's chic clientele a variety of products such as mortgages and lines of credit.
Because of its entertainment roots the bank successfully expanded in New York City over the past decade. Mr. McKay believes London's connection to this same industry is what offers the best growth potential to the United Kingdom.
Since he took over RBC last August, Mr. McKay has repeatedly stressed his desire to expand the bank's wealth management arm, but never suggested that such a major deal was on the horizon.
The CEO started pursuing City National in 2013, believing from the get-go that a deal would allow RBC to offer its existing U.S. clients a suite of private banking services. Now that a deal has been signed, Mr. McKay went so far as to note that RBC will likely start offering products such as "jumbo mortgages", typically loans that exceed usual limits, in cities such as New York.
The size of the transaction surprised some analysts. However, Mr. McKay said he and his team do not view this as a massive undertaking, despite the $5.4-billon price tag, because it amounts to roughly 5 per cent of RBC's market value. "We saw this as a very reasonable, manageable size," he said.
RBC is using cash and stock to acquire City National; $2.7-billion in cash and the rest in shares.
"With an acquisition premium of about 26 per cent, [RBC] is acknowledging that growth outside of Canada will be dilutive to overall profitability but that it is a trade-off it is willing to make," BMO Nesbitt Burns analyst Sohrab Movahedi wrote in a note to clients.
RBC has long focused on the high net worth market and the deal pivots the bank even more toward rich clients. Mr. McKay noted that the combined high net worth population of New York, San Francisco and Los Angeles is 4.5 times larger than Canada's equivalent market.
City National was founded in 1954 and it now has assets totalling $33-billion as well as assets under management amounting to $49-billion. The company made a profit of $256-million during its last fiscal year. City National's current CEO, Russell Goldsmith, who has run the company since 1995, will become the head of RBC's U.S. wealth management arm once the deal closes.
Boston-based analyst Brian Klock at Keefe, Bruyette & Woods said City National is well-known in financial circles despite its small asset base. Because of its high net worth clientele, particularly in New York, the bank has been on Wall Street's radar because "a lot of investment bankers could be their clients"
Mr. Klock said that RBC stepping up as the buyer for City National was a surprise to many Americans. "The thought was always that they might sell to Goldman [Sachs] or Morgan Stanley" he said. "But we never thought a Canadian bank would go to California."
Tim Kiladze