Byline: Matthew Monks
W. James Westlake knows there are second-guessers of Royal Bank of Canada's strategy to right its U.S. operations, but he says they aren't realistic.
After a speedy and ill-fated push past the Mason-Dixon Line a few years ago, Canada's largest lender is in no hurry like others to buy any more U.S. banks.
Yes, there are signs that its money-losing RBC Bank, a $33 billion-asset company in Raleigh, is finally turning the corner after being burned by bad loans to home builders. And yes, the company 'would certainly expect to be a consolidator' in the United States if and when the economy rebounds, said Westlake, Royal Bank's head of international banking.
But rushing into a deal right now could be rash, he said.
'We don't expect to be doing anything in the near future,' Westlake said in an interview Monday.
'We think that until banks are getting out of' the Troubled Asset Relief Program, 'and the capital and risk structures take shape, it will be very difficult to do a very normal market deal.'
Yet some analysts are questioning Royal Bank's strategy, saying it should take advantage of its relatively sound financial health and go on a buying spree in the United States while native banks are hobbled by the credit crisis. A Canadian banking analyst who declined to be identified because his company discourages its analysts from talking with the media said that RBC should go the other way and follow the lead of Toronto-Dominion Bank, which has made clear a desire to further penetrate the U.S. market through acquisitions and other means.
'In my opinion they are overly cautious,' the analyst said.
'This is the perfect opportunity to get out there. ... RBC has a better credit rating and more capital than [most] any other U.S. bank.'
Another says that abandoning caution now could make the bank prone to repeat mistakes.
Brad Smith, an analyst with Blackmont Capital Inc., said Royal Bank would be wise to shy away from deploying any more capital in the United States, after making seven acquisitions there since 2001.
He said Royal Bank's U.S. expansion - which began with its purchase of Centura Banks - has been plagued with missteps that culminated with a $915 million goodwill impairment charged in the fiscal second quarter.
'It's not working out,' Smith said. 'We don't think the U.S. retail banking business is a place where Canadian banks can create shareholder value.'
For his part, Westlake said Royal Bank is walking the line between those two views.
'I don't think that we should have been more aggressive recently,' he said. 'I can't speak for TD, but I haven't seen anybody buying anything that hasn't been a government-sponsored deal. I feel we have been prudent in waiting until the market sorts itself out.'
Royal Bank also has its hands full with RBC Bank, which has 430 branches in the Carolinas, Virginia, Georgia, Florida and Alabama. Though Royal Bank does not report financial results for the U.S. unit, it said RBC Bank's weak performance drove its international division to a loss of $1.03 billion loss in the quarter that ended April 30. The division, which includes U.S. and Caribbean operations, posted a profit a year earlier.
Westlake said the parent has taken a number of steps to turn things around at RBC Bank. It has limited its exposure to troubled loan segments such as commercial real estate by letting a sizable portion of such loans run off its books. He declined to be more specific, as Royal Bank doesn't disclose financial details about RBC Bank's loan portfolios, either.
The company has also addressed consumer credit issues by marketing more cards to existing customers with sound credit, rather than trying to drum up business with mass mailings to prospects, he said.
Westlake said there are signs that the worst has passed at RBC Bank. Provisions to cover U.S. loan losses may have peaked in the latest quarter, he said, after international provisions rose 45% from the prior quarter, to $264 million.
Though the company will likely have to continue building provisions, he said he expects them to rise at a lower rate.
Also, though its U.S. division's impaired loans rose in the latest quarter, they did so at a slower pace than in the prior quarter, which Westlake said was another good sign.
The unit's impaired loans rose 14% in the latest quarter, compared with a rise of 31% in the prior quarter.
'We hope that we are at or near the bottom and coming out the other side,' he said.
Whatever happens, Westlake said, Royal Bank is committed to the United States for the long haul, as it generates about 20% of its revenue there. The company also has a sizable wealth management and capital markets presence that he said the company could bolster through acquisitions down the line as well.
