“Royal Bank of Canada (RY – yield 4.40%) is Canada’s largest bank, with $730.6 billion of assets. Royal Bank recently agreed to sell its struggling U.S. retail banking business, which consists of 424 branches in six southeastern states. The buyer, PNC Financial Services Group (PNC), is also purchasing Royal Bank’s U.S. credit-card operations. Royal will hang onto its U.S. wealth-management and brokerage businesses.
“PNC Financial is paying $3.7 billion U.S. for these assets, with an option to pay up to $1 billion U.S. of the total in stock. If it does so, Royal will own 3% of PNC Financial. The sale should close in March 2012. If you exclude a $1.3-billion writedown related to this sale, Royal would have earned $1.6 billion, or $1.04 a share, in the three months ended July 31, 2011. That’s up 13.2% from $1.4 billion, or $0.92 a share, a year earlier. Royal is setting aside less money to cover bad loans: in the latest quarter, its loan-loss provisions fell 0.7%, to $275 million from $277 million. Revenue rose 2.0%, to $6.8 billion from $6.7 billion. The bank will probably use the funds from the sale of the U.S. retail banking business to finance the ongoing expansion of its wealth management operations in Europe and Asia. For example, it recently paid $1.5 billion for BlueBay Asset Management. This London, U.K.-based firm manages bonds and other fixed-income investments for institutional investors and wealthy individuals. Royal will probably earn $4.40 a share in fiscal 2011. The stock trades at 10.2 times that estimate. Royal Bank of Canada is a buy.”
Patrick McKeough, The Successful Investor, 12/11
