One of Canada’s largest banks is spending $5.4 billion on a Los Angeles-based bank. The move suggests the banks have few growth opportunities left in Canada.
The Royal Bank’s acquisition of City National Bank is the largest by a Big Six bank since the financial crisis in 2008. The deal comes as a surprise to both analysts and investors alike. In 2011, RBC sold its U.S. retail banking operations for $3.6 billion to focus on wealth management and capital markets. Getting back into the retail market south of the border with this buy, albeit with a client base that is much wealthier, it definitely highlights the dearth of Canadian growth opportunities.
Should advisors be worried?
No, not really, but it does highlight just how bleak our own economic picture is in relation to that in the U.S.
And RBC is not getting City National on the cheap. Speaking with Bob Sewell, CEO of Bellwether Investment Management, about the acquisition, Sewell said, “I think they had to pay up to do this transaction. The fact that it’s not accretive to earnings until 2018 tells you that in its current form they’re paying a hefty price.”
Typically, U.S. transactions happen at higher multiples than here in Canada so it’s simply the price of admission. Furthermore, as Northland Wealth Management CEO Arthur Salzer explains: “It has become very clear that none of the independent wealth owners want to sell to a bank, so in order to compensate for that hurdle, prices escalate significantly.”
With few opportunities in Canada to grow its wealth management business, Sewell believes the deal gives RBC’s U.S. wealth management division a much stronger foundation especially with City National CEO Russell Goldsmith running the show.
“Strategically, putting the financial stuff aside, it makes some sense for them because of the synergies they can begin to drive. Their last big transaction was Blue Bay in the U.K. and that’s worked really well. At the time it looked very expensive… but they’ve been able to really ramp up the assets in Blue Bay. I would assume they have the same view here.”
However, as they say in the mutual fund industry, past performance doesn’t guarantee future success. Integrating businesses is always tricky and synergies are never a slam dunk. Adding $33 billion in assets to its balance sheet, RBC’s regulatory costs increase and that’s reflected in the fact the acquisition won’t be accretive to earnings for another three years.
Yes, there are pros and cons to the City National deal but on balance it’s a good one for RBC according to Brian Klock, analyst for Keefe, Bruyette & Woods. “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.”
RBC’s purchase isn’t the first high profile wealth management deal by a Canadian bank south of the border but it is the biggest. Salzer points out, “…most if not all Canadian banks have been focusing on the U.S. wealth management market the past 5-7 years…. We believe this trend will continue.”
What’s good for the banks isn’t necessarily good for Canada.