Canada’s second-largest banking group has put a freeze on acquisitions in the US, saying the political climate under Donald Trump is making deals south of the border a “struggle”.
Dave McKay, president and chief executive of Royal Bank of Canada, made a foray into the US two years ago with the $5.4bn acquisition of City National, a Los Angeles-based bank that once lent Frank Sinatra the cash to pay a ransom for his kidnapped son. Mr Mackay said he wants to add to that platform, particularly in markets such as Washington, New York and Texas, to land a bigger share of the US wealth-management market.
But Mr McKay told the Financial Times he was reluctant to make a case for an acquisition to the bank’s board, given doubts over the pace of economic and fiscal reforms under the new president. An early setback over healthcare has cast doubt over Mr Trump’s ability to implement other big ideas, such as a shake-up of the tax code and an infrastructure spending plan.
Mr McKay noted that the success of such initiatives appeared to be embedded in banks’ share prices, which had mostly held on to the gains they made after Mr Trump’s victory in November. The KBW Nasdaq Banks Index is flat this year, having climbed about 25 per cent in the final few weeks of 2016.
“How do you value an acquisition right now? Man, I struggle,” he said. “If [share prices] have built tax reform in, if they’ve built higher interest rates in, if they’ve built economic growth in, and you’d expect to pay a premium — how do you get comfortable with that risk? The answer is to focus on organic growth, and save your capital.”
RBC’s push into the US is partly at the urging of credit rating agencies, which have warned that Canada’s biggest banks are too heavily geared to their home market. Earlier this month Moody’s downgraded several of the big banks, citing exposure to high home prices and heavy household debt burdens.
When Toronto-based RBC bought City National in 2015 it ranked as the biggest deal in the US banking sector for more than three years. On a second-quarter earnings call with analysts last week, Mr McKay cited double-digit growth in loans and deposits at the unit, and a 12 per cent year-on-year rise in net income to $57m, as evidence of the deal’s success. He described the US as the bank’s “second home market”.
RBC had C$1.2tn ($892bn) of assets at the end of April, a whisker behind Toronto-Dominion, with C$1.25tn.
For now, the CEO says RBC will continue to run “playbooks” of potential acquisitions, almost all of them in the US. But he will hold off from taking action until there is greater clarity over Mr Trump’s reform agenda.
“Six months from now, you might have a much greater insight,” he said. “But why pay a full price for those variables now?”
“We have the luxury of time and capital on our side,” he added. “We’re going to use that time well, to do our homework, to tweak our playbooks, so if the right moment presents itself, we’ll be ready.”