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Announcement:

Moody's: RBC acquisition of City National is credit negative

22 Jan 2015

Toronto, January 22, 2015 -- On 22 January 2015, the Royal Bank of Canada (RBC; Aa3 negative; C+/a2 stable) announced the acquisition of City National Corporation (CN; A3 stable) and its subsidiary City National Bank (A2 stable; C+/a2 stable) for approximately $5.4 billion (CAD6.6 billion) -- $2.7 billion in cash and around 44 million RBC common shares (approximately 50%/50%).

Neither firm's ratings are affected by this transaction. However, Moody's views this growth-seeking acquisition, which is outside RBC's strong Canadian base and in the more competitive US regional banking market, as credit negative and dilutive of its core strength. Given CN's geographical and business focus, RBC will find achieving its stated strategic objective of creating a scalable growth platform challenging.

With CAD941 billion in assets as of 31 October 2014, RBC is a large diversified universal bank with sustainable leading market shares in many retail and commercial banking products and services in Canada, where it benefits from a favorable market structure. RBC also has a significant commitment to global investment banking (which generated some 17% of its net income in fourth-quarter 2014) and is expanding this business, particularly in the US. RBC is currently the eighth largest wealth management firm in the US.

CN is a Los Angeles-based US private and commercial bank with $33 billion in assets and significant wealth management operations ($61 billion in combined assets under management and assets under administration). Its risk profile benefits from above-average asset quality and high core-deposit funding. Its major credit challenge has been its low profitability metrics compared to peers, owing to extended low interest rates. Its capital ratios are also low compared to peers.

As CN represents only 3.4% of RBC's assets and 2.2% of net income, this transaction is not financially material to RBC. However, although CN's standalone credit quality (baseline credit assessment of a2) is in line with RBC's, Moody's believes that the transaction will dilute RBC's key credit strength, which is the stable and recurring earnings power of its domestic personal and commercial franchise, where it has scale and pricing power. In addition, given that the purchase price represents a 26% acquisition premium (21.0X price/2015 consensus earnings per share and 2.6X price/Q3 2014 tangible book value per share), RBC has paid a full price for this asset.

The transaction marks the re-entry of RBC (which sold its regional banking business in 2012) into the US regional banking market. Earnings per share accretion is likely to take three years and depends on several assumptions of continued growth, expense synergies and successful cross-selling. In Moody's view, the execution risk associated with these strategies in the highly competitive US banking and wealth management market is significant.

***

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This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

David Beattie
Senior Vice President
Financial Institutions Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Ana Arsov
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's: RBC acquisition of City National is credit negative
No Related Data.
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