DBRS: City National 1Q Fundamentals Solid; Strong YoY Growth

Summary:
• City National Corporation reported net income available to common shareholders of $57.5 million, down 6% sequentially, but up 16% YoY.
• Loans and deposits both reached record levels, and asset quality remains pristine.
• 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) 1Q15 results as solid. Indeed, both loans and deposits reached record levels and asset quality improved from already pristine levels. Positively, assets, net income, loans and deposits all grew at least 10% year-over-year (YoY).

Reported total revenues increased 1% sequentially with higher noninterest income more than offsetting lower net interest income despite modest net interest margin expansion. However, 1Q noninterest income included securities gains and $5 million in insurance proceeds related to an insurable event at an investment affiliate. Meanwhile, noninterest expense increased 2%, but would have been up modestly excluding transaction costs related to the announced merger.

Loan growth was once again broad-based, while the deposit franchise remains robust. Indeed, average total deposits reached a record $27.8 billion, of which a very high 98% are core deposits.

Asset quality is pristine. Specifically, nonperforming assets comprised only 0.19% of total loans and leases and OREO, while net charge-offs were very modest. As a result of improving asset quality, City National had no provision for loan and lease losses. Overall, the allowance for loan and lease losses was sound at 1.48%.

City National is being acquired by Royal Bank of Canada (RBC) and the transaction is expected to close before the end of 2015. Upon close, DBRS would likely designate City National as a SA1 (DBRS’s highest level of support factoring in RBC’s ownership) and rate the Company at AA (low), one notch below RBC’s current Issuer Rating of AA with a Stable trend.

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.