What does RBC see in City National?

The Royal Bank of Canada (RBC) announced on January 22nd that they were acquiring City National Bank for $5.4 billion dollars.  RBC is paying 2.75x tangible common equity, and 1.86 times book value.  The deal price is one of the richest buyout multiples since the financial crisis.

City National is a $32b bank headquartered in Los Angeles, CA.  The bank has branches in entertainment hotspots throughout the country including, Beverly Hills, Nashville, Las Vegas, New York City, and Reno, Nevada.

The question is what does RBC see in City National that they’d pay such a high premium?

From a quantitative aspect there are a few things about City National that stand out.  The first is they earn a respectable ROA of .8% and have a declining Texas Ratio.  Secondly their foreclosure portfolio is declining and under control.  The bank is well capitalized, but not overly capitalized.  The bank has used excess capital to grow their loan portfolio, which in turn has contributed to growing earnings.

The true value for RBC are City National’s clients.  City National Bank has a reputation for being a primary destination for money coming from the entertainment industry.  This is clearly visible when one looks at their managed assets compared to their lending.  The bank has $13b in managed assets compared to $19b in net loans and leases.  While City National Bank has the word ‘bank’ in their title a significant amount of their earnings come from managing assets outside of the normal course of banking.

Beyond a jet-set list of clients RBC sees the opportunity to expand into Texas.  As a Canadian bank RBC is well versed in energy markets and they are hoping to expand in the US into the previously booming energy market of Texas.

The biggest question is whether RBC overpaid for City National Bank.  When setting the high water mark for deal metrics either one of two things is true.  Either the economy is in a strong recovery and we’ll continue to see deal volume at increasingly higher metrics.  Or RBC overpaid like they did with their last acquisition in the US in the fall of 2007.  A purchase that resulted in a massive write-down and a quick exit from US retail banking.

Only time will tell if RBC’s deal timing is poor, or if they overpaid.

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