TORONTO – (April 7, 2011) Clearlease.com Reports any sale of assets from Royal Bank’s (TSX:RY) U.S. operations would “remove a big factor” that has weighed on the share price of Canada’s largest bank, one analyst said Thursday as reports emerged that it is contemplating the sale of its U.S. banks.
Bloomberg News has reported that the Toronto-based bank was seeking buyers for its U.S. consumer and business operations, which are focused in the U.S. Southeast, an area particularly affected by an ongoing housing market crisis.
An RBC spokeswoman said the bank is committed to its U.S. growth strategy and declined further comment.
However, Barclays Capital analyst John Aiken said that a potential sale of its U.S. banking operations would be positive for the bank’s earnings and share valuation.
“We would anticipate that should the deal go through, the international segment would be immediately much more profitable, supporting the bank’s overall profitability metrics,” he wrote in a note to investors.
“This stems from the pressure that its U.S. retail banking has faced, being located in the U.S. Southeast, one of the harder hit areas in the real estate declines experienced by the U.S. over the past few years.”
Many of Canada’s big five banks, including Royal, Bank of Montreal (TSX:BMO) and TD Bank (TSX:TD), have been experiencing difficulty with their expansion into the U.S., which was hit worse than Canada during the 2008-2009 financial downturn and ensuing credit crisis.
However, Royal has been less optimistic than its peers about a recovery in the U.S. banking sector.
The bank has said its U.S. division, which suffered from the economic downturn, continues to present a challenging environment for retail bankers, though it is showing some signs of improvement.
Royal’s CEO Gordon Nixon told the bank’s annual meeting last month that it is reviewing its U.S. options, including the possibility of selling some assets in the country, which is still embroiled in a housing market crisis amid continuing high unemployment.
However, he added that its main priority remains improving operations, to make any merger or acquisition prospect more attractive.
Its international operations returned to profitability in the first quarter, which was faster than the bank had anticipated, after three years of net losses. The bank said the return to profitability was buoyed largely by its jointly-owned RBC Dexia investor services division and its Caribbean bank business.
In the first quarter, earnings from the segment were $24 million in the quarter against $1.8 billion for the total bank, but a loss of $57 million a year ago against a profit of $1.5 billion for the whole bank in 2010.
As a result, Aiken said, the impact of a sale on earnings would not likely be material; “it would reduce a headwind and remove a big factor negatively influencing sentiment towards the stock.”
He noted that Centura Bank’s operations have become significantly less of a factor in RBC’s overall operations in the past couple years.
Aiken believes RBC’s Carribean banking operations and its RBC Dexia joint venture would likely not be included in any deal.
Royal Bank is the country’s largest bank by assets and market capitalization, and has 77,000 employees serving more than 18 million clients. The bank has operations across Canada, the United States and more than 50 other countries.
Shares in RBC were down nine cents at $60.19 at mid-day Thursday on the Toronto Stock Exchange.
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