Royal Bank sells U.S. retail banking operations for US$3.62 billion

TORONTO – Royal Bank (TSX:RY) has agreed to sell its U.S. regional retail banking operations to PNC Financial Services for about US$3.62 billion and will take well over a billion dollars in losses as a result.

Canada’s biggest bank said Monday that it will face a C$1.6-billion loss that will be booked in the third quarter, which ends July 31. The loss includes an estimated $1.3-billion writeoff.

Royal Bank said the purchase will be comprised of cash as well as up to $1 billion in PNC shares.

Chief executive Gord Nixon told analysts on a conference call that Royal Bank weighed several different types of transactions but settled on PNC’s offer because it preferred the balance of cash and shares in the agreement.

“Specifically, the additional capital can be used to fuel organic growth across all of our business segments and invest in other businesses, such as wealth management, where we have been targeting some international asset managers,” Nixon said.

The transaction covers its RBC Bank operations, which will be sold for US$3.45 billion, and its credit card assets, sold for US$165 million.

Royal Bank operates under the RBC Bank banner in the U.S., with more than 400 branches throughout North Carolina, South Carolina, Virginia, Georgia, Florida and Alabama.

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The banks were formerly part of the Centura and other brands that were acquired by Royal starting a decade ago. However, the Canadian bank’s rapid expansion struck a major hurdle when the U.S. housing bubble burst and hit mortgage markets hard in southern U.S. states where the former Centura bank operated.

“Given the dynamics and highly competitive nature of the U.S. retail market and the increasing challenges as a result of both the economy and regulations, success in our view will require operational scale which can only be achieved by making large capital investments,” Nixon said.

“We believe we can achieve greater shareholder returns by investing the proceeds of this sale into higher return businesses.”

Nixon emphasized that the transaction doesn’t mean Royal Bank is fully exiting the United States, as it plans to continue operating both its U.S. wealth management and capital markets operations.

“In addition, we will maintain our existing cross-border banking platform for current and future clients with a targeted suite of cross-border products and services to meet their needs,” Nixon said in a release before stock markets opened.

Investors appeared to respond relatively favourably to the transaction, sending Royal’s shares up 22 cents to $54.55 in morning trading Monday on the Toronto Stock Exchange.

“I think there’s relief that it’s over and it didn’t take a long time” to sell the assets, said Kate Warne, Canadian markets specialist at Edward Jones in St. Louis.

“To a certain extent, buying banks that did a lot of real estate loans at the beginning of the real estate crisis wasn’t a great move and we can at least be relieved that they have gotten out of them.”

CIBC analyst Rob Sedran said in as note that despite Royal Bank booking a loss on the sale, the financial implications are positive.

“The deal should … be viewed favourably since Royal Bank was able, in our view, to extract a very full price. Management can now refocus on growing its core business and the deal will be accretive to both earnings and capital,” he wrote.

Despite the Royal’s troubles in the United States, other Canadian banks – TD Bank and Bank of Montreal – are doing well in the American market.

TD’s former Banknorth and Commerce Bank franchises – renamed as TD Bank N.A – are among the biggest regional banks in the United States, operating throughout New England and the northeastern states. Meanwhile, Bank of Montreal has a growing banking and wealth management franchise from its Harris Bank operations based in the Chicago area.

The sale of the banking assets face the usual closing conditions, including regulatory approvals, and the transaction is expected to close in March 2012.

A Wall Street Journal report on Sunday said that Pittsburgh-based PNC beat out rival regional bank BB&T Corp. for the Royal Bank operations.

PNC chairman and CEO James Rohr said in a statement that the RBC acquisition will give PNC access to “attractive southeast markets in a way that will create value for our shareholders.”

The deal adds about $19 billion of deposits and $16 billion of loans based on RBC Bank (USA) balances as of April 30, Rohr said.

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