Royal Bank to buy U.S.-based City National in US$5.4-billion deal

TORONTO – Several years after selling its U.S. retail banking business, the Royal Bank of Canada (TSX:RY) is venturing south of the border again, with a US$5.4-billion deal to acquire Los Angeles-based City National Corp.

The bank says the deal will allow it grow its wealth management business in the United States, a key focus for the bank as consumer borrowing in Canada begins to wane.

“City National’s clients are largely high net worth individuals and commercial enterprises — two of the fastest growing client segments in the U.S.,” RBC chief executive Dave McKay told investors during a conference call Thursday.

RBC’s U.S. operations were hit hard when the housing bubble burst and homeowners couldn’t afford to make their mortgage payments. The bank booked more than a billion dollars in losses in 2011 when it sold its retail banking segment in the U.S. Southeast.

Morningstar analyst Dan Werner said he was surprised when he heard about the deal Thursday.

“RBC has really downplayed going back into the U.S.,” Werner said.

“Having said that, this is probably as good a franchise as they could get given their business model,” said Werner, noting that City National’s focus on wealth management complements RBC’s priorities.

“It’s not as retail focused as what they had before in the U.S.”

Werner said he expects wealth management to be the growth engine for most major banks.

“What the wealth management business brings is stability in fee revenue, and given how the markets have done and seem to be expected to do going forward, that’s where you’re going to see the revenue growth for a lot of banks going forward,” he said.

Werner also noted City National is concentrated on the West Coast, so RBC won’t have to compete with other Canadian banks operating south of the border. Bank of Montreal (TSX:BMO) is focused on the U.S. Midwest, while TD Bank (TSX:TD) is primarily in the Northeastern U.S.

McKay said City National is strategically positioned in the largest and most attractive U.S. markets including New York, Los Angeles and the San Francisco Bay area.

“In fact, the combined high net worth population of these three markets is over four-and-a-half times the entire high net worth population of Canada,” McKay said.

The head of City National (NYSE:CYN) will remain with the company and also be responsible for RBC’s wealth management business in the United States.

RBC has about 340,000 U.S. households as clients of its wealth management arm. The deal, which will be paid for using a combination of cash and shares, will enable the bank to offer a broader range of financial products to those clients, McKay said.

Under the proposed deal, City National shareholders would get the equivalent of US$93.80 per share — roughly half in cash and half in Royal Bank shares.

City National shares closed up US$14.11 or about 19 per cent at US$88.68 on the New York Stock Exchange.

The deal requires various approvals from regulators and City National shareholders.

“We’re very enthused about merging with RBC,” said Russell Goldsmith, who is City National’s chairman and CEO.

“It will deliver significant value to our shareholders along with the opportunity to participate in the future growth of RBC.”