DBRS Comments on RBC’s Sale of RBC Bank (USA)

DBRS has reviewed the announcement made by Royal Bank of Canada (RBC or the Bank) that it will sell its U.S. regional retail banking operations, consisting of RBC Bank (USA) and related credit card assets, to PNC Financial Services Group, Inc. (PNC). There are no rating implications.

While the sale of RBC Bank (USA) is a positive development, it is not expected to have a material impact on the overall credit profile of RBC. Total proceeds are expected to be US$3.62 billion, consisting of cash and up to US$1 billion in PNC common stock.

Under Canadian Generally Accepted Accounting Principles (GAAP), RBC anticipates an after-tax loss of $1.6 billion, of which $1.3 billion will be due to goodwill write-off. The impact of the sale will result in pro forma capital increases in the Bank’s Tier 1 common equity and Tier 1 capital ratios of 100 basis points and 140 basis points, respectively. The sale is expected to be accretive to earnings in 2012. The transaction is anticipated to close in March 2012 and is subject to regulatory approvals.

Improving profitability at RBC Bank (USA) had been a significant challenge for the Bank. RBC Bank (USA) has been restructuring its franchise in order to increase returns. DBRS believed RBC Bank (USA) did not have the economies of scale in products and services to compete on its own in the longer term.

RBC will continue to expand its other global operations, including wealth management, as well as capital markets. Both of these are key segments of the Bank’s growth strategy.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations, Rating Bank Preferred Shares and Equivalent Hybridsand Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website, www.dbrs.com, under Methodologies.

The source of information used for this rating includes Royal Bank of Canada.