Royal Bank of Canada is buying the 50-per-cent stake in RBC Dexia Investor Services that it doesn't already own from its struggling European partner.
Canada's largest bank will buy the 50-per-cent stake of RBC Dexia partnership from Banque Internationale à Luxembourg SA for $1.1-billion in cash.
The deal will give RBC full control of the European business, which advises institutional investors and administers of large pensions and investment funds. The assets went on the block last year when Banque Internationale à Luxembourg (previously known as Dexia Banque Internationale) was hit hard by the European banking crisis and forced to jettison assets to stabilize its operations.
The stake in RBC Dexia Investor Services is among Banque Internationale's collection of profitable assets that are being sold to raise capital.
"It is a strong business that generates stable revenue in an attractive sector that is well positioned for long-term growth," RBC chief executive officer Gordon Nixon said in a statement announcing the deal. "It has a premier list of institutional investor clients globally and fits well with our diversification strategy."
The deal makes RBC the 10th largest in the global custodian business, a segment of the industry in which banks manage funds on behalf of institutional clients such as pension funds.
"We really like the business," Jim Westlake, group head of international banking and insurance at RBC, said in an interview. "In conjunction with the plans we have for both wealth management and capital markets, this just fits very nicely in that space."
The deal had been in the works for some time, Mr. Westlake said, adding that RBC will rename the business under its own brand.
Franco-Belgian Banque Internationale has been under intense pressure to shed assets to stabilize its operations. It received bailout financing from governments in Luxembourg, Belgium and France last fall, in exchange for nationalizing its retail banking operations in Belgium in exchange for €4-billion ($5.6-billion).
As that bailout deal was taking place, analysts expected RBC would pursue a buyout of its partnership with Banque Internationale, which began in 2005.
On a conference call with analysts Tuesday, Mr. Nixon said the business remains viable despite the European parent's other issues. "We are buying this asset at what we believe is a very attractive time and a very attractive price," he said. "The partnership was of great value, we believe in building this business," he added. "Unfortunately [Banque Internationale's]circumstances changed."
Though the business does not manage most of its funds directly, it acts as a custodian bank for $2.8-trillion worth of assets, earning lending fees while also overseeing the movements of those investments.
Since it began, the RBC-Dexia partnership was able to make tidy, low-risk profits when times were good. But the business has seen its profits fall sharply in the past three years amid slumping markets and economic turmoil. That has driven down the value of the partnership at a time when Dexia, engulfed by the European banking crisis, was seen as a distressed seller.
Luxembourg's Finance Minister Luc Frieden said in October that RBC had signalled its intent to exercise the Canadian bank's right of first refusal to buy the other 50 per cent of the joint venture it didn't own.
The joint venture contributed $29-million to RBC's profit in 2010, down from $34-million in 2009.
The deal is subject to regulatory approvals and is expected to close in mid 2012.
As part of the agreement, RBC Dexia has sold $1.9-billion worth of Dexia Group fixed-income securities back to the Dexia Group, which is the partnership, and acquired approximately an equivalent amount of U.S. dollar-denominated securities in exchange, the bank said. Those securities are made up of notes issued by large global financial institutions.
RBC Dexia will incur a loss from the sale of Dexia Group securities in the second quarter of approximately $30-million after tax, the bank said.
RBC will also revalue its existing 50-per-cent stake in the joint venture to reflect the purchase price, which will result in a writedown of about $170-million after tax, the bank said. That loss will also be recorded in the second quarter.