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NATHAN DENETTE

There may be a way to pick up shares of the RBC on the cheap, but consider it a long shot.

Some market watchers think Canada's No. 1 financial institution has no choice but to eventually buy a major regional bank in the U.S. Southeast. The reason: The bank has to bulk up to a position of size to make it in the U.S. retail market, where currently it is something of an also-ran.

Three likely acquisition candidates fit the bill, according to Michael Goldberg, bank analyst at Desjardins Securities, who views Atlanta-based SunTrust , BB&T Corp. of Winston-Salem, N.C. and Regions Financial of Birmingham, Ala., as the best fits. Their current market capitalizations range from about $8.5-billion (U.S.) to $18-billion.

Given that Canadian regulators don't want banks to be shelling out billions in cash in these perilous times for acquisitions, Mr. Goldberg says any deal would have to be an all-stock share exchange. His educated guess, given that there haven't been many transactions to use as a guide, is that RBC would need a 20-per-cent premium to lock in any deal.

Royal Bank stock chart

At current prices, if such a deal were to happen and at that premium, it would amount to getting RBC shares for around $44.50 (Canadian), a sweet addition to any portfolio considering recent trading at $53.50.

To be sure, there is no guarantee of a deal, but as a theoretical exercise, Mr. Goldberg has done some number crunching in two recent research reports, looking at the pros and cons of RBC taking a run at one of the three banks.

Asked if he thinks the trio of U.S. banks might be a better buy than RBC, given his takeover musings and the potential premium, Mr. Goldberg said "that could be."

RBC, for its part, has been telling analysts its priority in the U.S. is to fix its low-profitability commercial banking business, which might take a couple of years.

Some analysts think the possibility of a U.S. acquisition is remote and believe RBC places a higher priority on doing a smaller deal in Britain to bolster its wealth management division.

"My sense has not been that they're falling over themselves to do U.S. deals," says Mario Mendonca, bank analyst at Canaccord Financial Inc.



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Mr. Mendonca finds it difficult to believe RBC would do a big U.S. acquisition now because capital and liquidity standards are in flux, suggesting its bankers would have a hard time making precise return-on-equity calculations in any takeover.

"That would show enormous guts on their part" to do a deal with so much regulatory uncertainty, Mr. Mendonca says.

If RBC were to do a big deal, investors would likely punish the bank's shares in the short term because any acquisition would almost certainly dilute earnings. Investors also are wary of forays into the tough and dangerous U.S. banking market.

But over the longer term an acquisition would more than pay for itself if it creates a stronger business platform for the bank's core area of operation in the U.S. Southeast.

Another thing going for the deal is the Depression-like condition of the U.S. banking industry, making shares of targets cheap.

As Mr. Goldberg sees it, RBC faces a tough choice in the U.S. retail market: Either to give up and go home, or get big. He estimates that a financial institution needs to be among the top five banks in terms of deposit share in a metropolitan market to have a decent platform from which to make money.

"If you want to go into the United States you have to be going after top-five market positions. Being the No. 10 bank in Tulsa is a waste of time," he said.

The only community where RBC is now No. 1 is in Rocky Mount, N.C., according to data compiled by Mr. Goldberg. It's largest market is Atlanta, but there it is only No. 7.

He says a window of opportunity exists for RBC to cut a deal, but it "may not be there permanently."

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