Royal Bank to buy rest of Dexia for $1.1B

‘Stable, low-risk business’ with room for growth

After months of speculation, Royal Bank of Canada said it has struck a deal to acquire the 50% stake in RBC Dexia that it doesn’t already own from Banque Internationale à Luxembourg SA for about $1.1-billion in cash.

One of the world’s largest custody banks with $2.7-trillion in assets, RBC Dexia was formed as a joint venture between the two lenders back in 2006, generating a stream of modest but consistent earnings for both partners.

As a result of holdings of dodgy European debt, Banque Internationale — then known as Dexia SA — was forced to accept a bailout last fall from the governments of Belgium, France and Luxembourg in connection with the parts of the operation that were nationalized. In a bid to further shore up the balance sheet, non-core businesses were put up for sale, including the joint venture.

“We like the transaction,” said UBS analyst Peter Rozenberg, who observed in a note to clients on Tuesday that RBC Dexia “is a stable, low-risk business, with good growth prospects and low capital requirements, purchased at a low point, given low rates and uncertain ownership.”

In recent years, Royal Bank has been increasingly working to build its international operations in Europe and Asia.

“Full ownership of RBC Dexia will allow us to leverage RBC’S excellent reputation and financial strength to win additional business and drive growth,” said Jim Westlake, head of international banking and insurance at Royal Bank.

“This is a very scalable business with leading infrastructure and processes already in place. It is well positioned to benefit from higher interest rates and an improvement in market asset values,” Mr. Westlake added.

Based in London, RBC Dexia provides institutional investors around the world with a wide range of services including global custody and

fund and pension administration.

The deal is expected to close by the end of June.

In connection with the transaction, RBC Dexia has sold ¤1.4-billion of Dexia Group fixed-income securities back to Dexia Group and acquired an equivalent amount of U.S. dollar-denominated securities consisting primarily of notes issued by large global financial institutions.

RBC Dexia will take a loss from the sale of the Dexia Group securities and RBC’S share of this loss works out to about $30-million after tax. That loss will be recorded in the second quarter.

“There was never any question that RBC would purchase the rest of this asset — timing and price being the only open questions,” said Rob Sedran, an analyst at CIBC World Markets.

In 2011, RBC Dexia had a profit of ¤123-million and a book value at Dec 31 of ¤1.7billion.

According to Mr. Sedran, the purchase price works out to 13.5 times trailing earnings, roughly in the range analysts had been expecting.

Speaking in an interview, Mr. Westlake said Royal Bank would have preferred to come to a deal before now, “but the reality is [Banque Internationale] had a lot of issues in a number of areas. They were a good partner of ours for the last few years and I have a lot of empathy with what they’ve been dealing with.”

Like many financial firms, custody banks have been struggling in the current low interest rate environment with profits for many players coming under pressure. However, RBC Dexia is a strong company with diverse operations, which has helped it to weather the tough conditions.

“We think this is a growth story,” he said, adding that for customers looking for a global custody bank that is not focused on the United States, RBC Dexia is an obvious choice.