DBRS: City National’s 4Q13 Growth Remains Robust; Core Earnings Stable QoQ

Summary:

• City National reported record levels of loans, deposits, assets, and investment assets under management.
• Significant net interest margin pressure, securities losses, and higher expenses resulted in lower QoQ net income, but on a core basis, earnings were relatively stable.
• DBRS rates City National Corporation Issuer & Senior Debt at ‘A’ with a Stable trend.

DBRS, Inc. (DBRS) considers City National Corporation’s (City National or the Company) 4Q13 results as very solid even with lower QoQ reported earnings given continued robust loan and deposit growth, and the maintenance of the Company’s strong balance sheet. Specifically, reported net income attributable to City National declined 13% sequentially to $55.1 million. However, excluding securities gains and losses, as well as the impact of the covered loan portfolio, adjusted pre-tax earnings were relatively stable.

Positively, the Company reported record levels of loans, deposits, assets, and investment assets under management. During the quarter, loan growth was broad-based resulting in average loan growth, excluding covered loans, of 5%, or a very robust 20% for the year. Deposit growth remained strong and Wealth Management benefitted from organic growth and higher equity market valuations.

The Company’s net interest margin compressed a significant 33 bps during the quarter to 2.97%, but the decline was primarily related to lower FDIC-covered loan prepayments and portfolio run-off. Management noted that the margin should remain under modest pressure in 2014.

Noninterest expenses increased a high 5% sequentially, but overall expense management remains sound. Indeed, excluding the impact of two 2012 acquisitions, noninterest expenses would have been down 1% in FY13, which is commendable given the continued investments in the businesses, as well as the heightened regulatory and compliance environment.

City National’s balance sheet remains strong with low levels of nonperforming assets, material recoveries, and robust deposit funding, all of which support the rating.

Capital remains sound. During the quarter, the Company transferred approximately $1 billion of securities into held-to-maturity to help protect against capital volatility.

DBRS rates City National Corporation Issuer & Senior Debt at ‘A’ with a Stable trend.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]