DBRS: City National 4Q Results Sound with Continued Strong Loan and Deposit Growth

Summary:
• City National Corporation reported net income of $66.0 million, down 4% sequentially, primarily reflecting higher expenses.
• Average 4Q loan and lease growth (excluding FDIC-covered loans) of 4% was broad-based, while average deposit growth was an even stronger 6%.
• DBRS rates City National Corporation Issuer & Senior Debt at ‘A’ Under Review with Positive Implications.

DBRS, Inc. (DBRS) views City National Corporation’s (City National or the Company) 4Q14 results as sound with continued strong growth in both deposits and loans. Moreover, the Company once again reported net recoveries, which contributed to a reversal of provision for loan losses. Positively, management noted that loan demand is modestly increasing and that City National has strong momentum across all of its businesses.

Today, City National announced it has agreed to be acquired by Royal Bank of Canada (RBC – rated AA with a Stable trend) in a stock and cash transaction valued at approximately $5.4 billion, based on RBC’s closing stock price on January 21, 2015. The transaction is expected to close in 4Q15, subject to customary conditions, including regulatory and City National shareholder approvals. As a result of the announcement, DBRS placed the Company’s ratings Under Review with Positive Implications.

Total revenues increased modestly during the quarter with solid net interest income growth more than offsetting a decline in noninterest revenues. Meanwhile, noninterest expense increased 3% sequentially reflecting higher legal and professional fees, increased marketing and advertising expense, as well as higher compensation costs related to stronger-than-expected revenue growth. For the year, City National generated positive operating leverage.

Average loan and lease balances (excluding FDIC-covered loans) and average deposit balances both reached record levels. The robust deposit franchise provides City National with strong liquidity and a very low cost of funds, both of which help underpin the rating.

Asset quality remains very strong with very low nonperforming assets and net recoveries. Meanwhile, capital remains sufficient even with significant balance sheet growth in 2014. DBRS notes that a dividend increase was just approved by the Board of Directors raising the dividend to $0.35 from $0.33 payable in February.

DBRS rates City National Corporation Issuer & Senior Debt at ‘A’ Under Review with Positive Implications.

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