Royal Bank of Canada is cleaning up City National Bank’s balance sheet after the US lender posted a money-losing quarter amid higher rates and the crisis of confidence at regional banks.
(Bloomberg) — Royal Bank of Canada is cleaning up City National Bank’s balance sheet after the US lender posted a money-losing quarter amid higher rates and the crisis of confidence at regional banks.
RBC made a capital injection into City National and bought debt securities from it, boosting the Los Angeles-based division’s liquidity and capital and allowing it to pay down higher-cost borrowing.
The moves resemble an “internal bailout,” Keefe, Bruyette & Woods analysts Mike Rizvanovic and Abhilash Shashidharan wrote in a note to clients. They said they don’t expect a significant impact on RBC’s financial results, but “the need for such measures is a negative read-through on City National Bank’s health.”
Royal Bank shares were up 0.6% to C$119.42 at 12:19 p.m. in Toronto
The bank didn’t disclose what it paid for City National’s securities or how much it injected into the bank. Canada’s largest financial institution said it was proactively announcing the moves ahead of a US regulatory filing, expected within the next month, and its own fiscal fourth-quarter results.
“This is part of the management actions that RBC is taking on the path to improving profitability at City National,” RBC spokeswoman Gillian McArdle said. The sale of securities by City National will result in realized losses at the US bank, but those will be eliminated at the parent-company level.
City National was swept up earlier this year in the US regional bank turmoil, which hurt liquidity and net interest margin — the difference between what banks make from lending and what they pay for deposits — at lenders across the country.
“Everything went against us this quarter” at City National, Royal Bank Chief Executive Officer Dave McKay said on a conference call with analysts last month. “This business is well below our expectations for this year.”
He cited a credit loss on an office property loan as well as sensitivity to rising interest rates, as depositors sought out higher returns.
But McKay has also said he sees the business turning around in the coming months. “You’ll see it stabilize in Q4 and improve next year, and we still see enormous opportunity for the City National franchise,” he said at an investor conference in early September. RBC bought City National for $5 billion in 2015 and “we tripled this bank since we acquired it,” he added.
Paul Gulberg, a senior equity analyst at Bloomberg Intelligence, said the moves Friday shouldn’t affect capital levels at RBC, which is looking to close its C$13.5 billion ($10 billion) deal to acquire HSBC’s Canadian operations in the first quarter of 2024.
The bank has previously said its common equity tier 1 capital ratio would remain above 12% after closing the transaction. Current regulatory rules require it to maintain a CET1 ratio of 11.5%, and Canada’s banking regulator is set to review that level in December.
(Updates throughout, adds comments from bank and analyst.)
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