DBRS: City National Reports Record Levels of Net Income, Loans and Deposits in 3Q

Summary:
• City National Corporation reported record net income available to common shareholders of $67.7 million.
• Following regulatory approval, the Company expects their merger with Royal Bank of Canada (RBC) to close on November 2, 2015.
• 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) 3Q15 results as evidencing franchise strength through continued strong execution. Indeed, loan and deposit balances are at record levels and growth has been broad-based. Specifically, average loans (excluding acquired impaired loans) increased 3%, while average core deposits grew a very strong 6% sequentially. Further supporting the rating, asset quality is still improving and is very strong.

While revenues were down and expenses increased sequentially, net income benefited from a $6 million reversal of the allowance for loan and lease losses. Net interest income, on a FTE basis, was down 2% sequentially despite broad-based loan growth, reflecting net interest margin pressure. Specifically, 3Q15 net interest income included $9.5 million from acquired impaired loans that were repaid or charged off during the quarter compared to $16.2 million in 2Q15, which was the primary driver in the margin’s significant 24 basis points decline to 2.92%.

Noninterest income was down modestly, although brokerage and mutual fund fees were higher. Lower market valuations drove a 3% decline in assets under management or administration.

Expenses increased 3% sequentially reflecting higher personnel additions, as well as higher legal and professional fees.

Net recoveries of $6.2 million ($5.2 million YTD) in the quarter combined with low levels of nonperforming assets resulted in the reversal of allowance for loan and lease losses. Overall, the allowance for loan and lease losses remains very sound at 1.41% of total loans and leases, excluding loans and OREO assets acquired in City National’s FDIC-assisted acquisitions.

City National is being acquired by RBC and the transaction is expected to close on November 2, 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, 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.