RBC looking to rebuild capital after buying City National
Royal Bank of Canada’s $ 5- billion purchase of City National Corp., its largest- ever takeover, is forecast to put the lender on the sidelines for further acquisitions and share buybacks until it can rebuild capital to levels that satisfy regulators.
Royal Bank, the country’s secondlargest lender by assets, will have the lowest capital strength among the biggest Canadian banks after its takeover of Los Angelesbased City National, analysts including Scotia Capital’s Sumit Malhotra said. The Toronto- based lender could face further capital requirements if global regulators designate Royal Bank as systemically important this week.
“We’ve got a plan to rebuild our capital to that target ratio that we had before,” Royal Bank chief executive officer David McKay said in a Monday interview. “It’s going to take us quarters, not years, and it’s a very reasonable plan and it will have, hopefully by the end of 2016 — which is very soon — all the capital deployment capabilities that we have today.”
Royal Bank, which on Monday closed its City National takeover, said in September its common equity Tier 1 capital ratio could be about 9.5 per cent after completing the deal, compared with 10.1 per cent as of July 31. Canada’s six- largest lenders averaged 10.2 per cent as of July 31.
Tier 1 capital consists of a bank’s common equity, including cash reserves, and qualifying preferred stock, all of which absorb losses when a bank is in financial stress.
The final price for City National, which was paid with $ 2.6 billion cash and 41.6 million of RBC shares, is lower than the announced value of $ 5.4 billion in January, according to a Monday statement..
Royal Bank Chief Financial Officer Janice Fukakusa said in an Oct. 30 emailed statement that after City National’s close and “over the next number of quarters” the lender aims to lift its capital back up to approximately a 10 per cent level.
Royal Bank may look at buybacks or “selective acquisitions” after hitting that target, she said at a Sept. 17 banking conference.
Canadian banks have earned international recognition for their capital strength and for sidestepping the financial crisis, with the World Economic Forum ranking them the world’s soundest for eight straight years.
Canada’s Office of the Superintendent of Financial Institutions told banks in March 2013 that they’re systemically important domestically and need to reserve an additional one per cent of riskweighted capital by 2016 to safeguard against failure.
That added to OSFI’s requirement that lenders hold at least seven per cent core Tier 1 capital by January 2016.
Royal Bank also faces the prospect of being named a globally systemically important bank, or G- SIB, by the Financial Stability Board, which may require the lender to hold an additional one per cent of capital or more above Basel levels.
OSFI hasn’t said if such a designation would mean additional requirements above the Canadian regulator’s demands. Annik Faucher, spokeswoman for the regulator, said in an Oct. 22 emailed statement that, if a Canadian bank was designated a G- SIB, OSFI would communicate additional requirements, if any.
Royal Bank will face pressure to boost its balance sheet since a 9.5 per cent capital ratio over time will be viewed as low by creditors and regulators, said David Beattie, a senior vice president for Moody’s Investor Services.
“It doesn’t leave a lot of wiggle room,” Beattie said on Oct. 22.