File photo of the Royal Bank of Canada branch in Old Montreal.Ryan Remiorz
Royal Bank of Canada's first-quarter financial results suggest that the lender is doing better than expected with its recent acquisition of Los Angeles-based City National Corp.
The $5-billion (U.S.) deal, the largest in RBC's history, is a big bet on private and commercial banking in the United States, and the belief that RBC's size and diversification will help City National hold on to high-net-worth clients who otherwise might move to full-service U.S. financial firms.
The deal also came at a significant cost to RBC's common equity Tier 1 (CET1) ratio, a measure of capital levels watched closely by bank regulators: It cut the ratio by 0.94 percentage points, or 94 basis points, which was deeper than a previous estimate because of the higher U.S. dollar. RBC finished the quarter with a CET1 ratio of 9.9 per cent, below the 10-per-cent threshold that banks maintain.
After one quarter within RBC, though, City National appears to be paying off. It added $53-million (Canadian) to RBC's quarterly profit, or $107-million after adjusting for various acquisition and integration costs.
While that's puny next to RBC's $2.4-billion in profit over all during the first quarter, it's well ahead of the bank's more modest expectations when it was putting the deal together a year ago; back then, RBC thought it would take a year for City National to contribute any earnings due to acquisition costs.
No doubt, the stronger U.S. dollar helped, but City National also reported a 14-per-cent increase in loans in the first quarter from last year and a 12-per-cent rise in deposits – double-digit growth that lenders can only dream about in Canada.
"They have a good underlying core growth in their business," Janice Fukakusa, RBC's chief financial officer, said in an interview.
She also pointed to better-than-expected synergies, or efficiencies gained from combining the two banksin the early stages of integration.
"The rest of the year will depend on what happens with the interest rate environment," Ms. Fukakusa said. "If you look at City National, its balance sheet is positioned for rising interest rates."
The Federal Reserve raised its key rate by a quarter of a percentage point last year, but observers aren't confident about the path of rate increases this year, given the uncertain outlook for the global economy.
RBC plans to say much more about its integration of City National at the bank's investor day, on March 4.
David Berman