DBRS: City National Reports Record 2Q; Positive Operating Leverage and Strong Growth

Summary:
• City National Corporation reported record net income available to common shareholders of $64.4 million, reflecting positive operating leverage and strong growth.
• City National shareholders easily approved the planned merger with Royal Bank of Canada, which is expected to close before the end of the year.
• 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) 2Q15 results as strong, reflecting positive operating leverage and strong loan and deposit growth. Results did benefit from a large legacy loan interest recovery, but record levels of loans, deposits, and net income evidence strong and successful execution.

The Company generated positive operating leverage with particularly strong growth from net interest income, which increased 9% sequentially. While net interest income did benefit from a large legacy loan recovery and higher income on covered loans that were repaid or charged off during the quarter, both of which bolstered City National’s net interest margin, continued broad-based loan growth has also contributed to revenue growth. Meanwhile, expenses were down modestly sequentially, or relatively stable excluding transaction costs related to the pending merger.

Asset quality remains a strength with very low levels of nonperforming assets and charge-offs. Moreover, classified ratios remain at low levels and overall credit trends remain positive. After taking no provision in 1Q, City National had a $10 million provision for loan and lease losses, primarily reflecting loan growth, not credit deterioration.

DBRS notes that the Company performed very well under the severely adverse scenario incorporated into the Dodd-Frank Act Stress Test. Indeed, City National reported cumulative net income of $166.8 million over the nine-quarter planning horizon.

City National is being acquired by Royal Bank of Canada (RBC) and the transaction is expected to close before the end of the year. 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, one notch below RBC’s current Issuer Rating of AA with a Negative 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.