RBC to launch US consumer bank betting for wealthy clients

Royal Bank of Canada (RBC) plans to open a consumer bank in the United States early next year targeting wealthy clients, with the aim of expanding deposits, its chief financial officer told Reuters after the bank posted first-quarter profit that beat expectations.

“We want to broaden the product and service offering that we have (in the US), similar to what we have in Canada,” CFO Rod Bolger said. RBC’s consumer bank would initially focus on high-net-worth clients in US but eventually target the “mass affluent” as well, he said.

With this strategy, RBC is joining US rivals including Bank of America, which are expanding their private banking arms.

RBC’s US business, including City National bank, which it acquired in 2015, accounts for 23 per cent of total revenue. Profit at RBC’s overall wealth management business, which accounts for 20 per cent of earnings, grew 4 per cent from a year ago.

“The loan book has been growing faster than the deposit book, so growing our deposit strategy has become of paramount importance,” Chief Executive David McKay said on an analyst call.

Rather than a “commercial-driven strategy” focusing on products to draw consumers and cross-selling to them, the new bank would take a client-centric approach, McKay said.

Royal Bank of Canada plans to roll out a direct-to-consumer bank in the US as it seeks to boost its deposit base and wealth-management franchise.

“The loan book has been growing faster than the deposit book, so growing our deposit strategy has become of paramount importance,” said David McKay.

Bolger declined to provide details about costs and size of the new bank.

RBC’s earnings surprise was driven by record profit in capital markets as revenue from bond trading and dealmaking rose. But executives said dealmaking could be hit if geopolitical concerns, including the coronavirus outbreak, linger. Following the worst year for earnings growth since the financial crisis, senior RBC executives told analysts the bank could also see margin compression this year.

RBC shares rose 1 per cent to C$109.07 in afternoon trade in Toronto, compared with a 0.6 per cent drop in the Canadian stocks benchmark.

“While we thought we had modeled a surge in capital markets-related revenues, the actual results made our forecasts look more like a ripple in the pond,” Robert Sedran, an analyst at CIBC Capital Markets, wrote in a note.

Strong loan growth, particularly in Canadian residential mortgages, bolstered the bank’s personal and commercial banking business, which rose 7 per cent from a year earlier.

Royal Bank of Canada’s dealmaking division is back to proving its worth. The RBC Capital Markets unit had record earnings in the fiscal first quarter, helping Canada’s largest lender post results that beat analysts’ estimates. Fees from investment banking jumped 82 per cent from a year earlier amid a better dealmaking environment, and fixed-income trading more than doubled.

The turnaround, which follows back-to-back profit declines in the division, helped Royal Bank post an 11 per cent jump in earnings for the three months through January. The comeback follows a similar rebound at US investment banks, which reported an improvement in trading revenue when they announced fourth-quarter results last month, and sets a benchmark for the other large Canadian lenders when they report their earnings next week.

“Both trading revenues and underwriting and advisory revenues easily surpassed our forecasts and pushed earnings past our above-consensus estimate,” Robert Sedran, a CIBC Capital Markets analyst, wrote in a note.

Trading revenue rose 21 per cent to C$1.27 billion ($954 million). The increase helped make RBC Capital Markets the bank’s top-performing business for the quarter. Profit in the division surged 35 per cent. Royal Bank’s adjusted per-share earnings of C$2.44 beat the C$2.30 average estimate of analysts in a survey.

Royal Bank rose 1.2 per cent to $109.31 at 9:37 a.m. in Toronto. It has gained 6.4 per cent this year, making it the top performer in the eight-company S&P/TSX Commercial Banks Index, which has climbed 3.6 per cent.

The lender has the biggest investment-banking operations among Canada’s large banks, with significant business in Canada and the US and a growing platform in Europe. That helped Royal Bank land more deals, lifting underwriting and advisory fees to C$627 million from C$345 million a year earlier. The Toronto-based lender set aside less money for soured loans, after rising credit losses caused concern among investors last year. Provisions for credit losses fell 18 per cent to C$419 million from a year earlier, when it was hurt by bad loans to a US shopping-mall owner and bankrupt California utility PG&E Corp.

Agencies