(September 28 – 12:00 ET) – Standard & Poor’s has affirmed the ratings of the Royal Bank of Canada and its subsidiaries after the bank’s announced plans to acquire Dain Rauscher & Co., a U.S. brokerage firm. S&P says the bank’s outlook remains stable.
The ratings agency says Royal’s planned acquisition of Dain Rauscher & Co. for $2.2 billion will not impair the bank’s creditworthiness. The transaction will be largely funded with up to $750 million in hybrid preferred stock and $500 million in common equity so that tangible economic risk capital will not be significantly reduced despite the addition of goodwill. It says Royal’s capitalization will remain in the midrange of Canadian banks.
The Dain Rauscher deal is part of Royal’s strategy of piecing together a banking franchise in the U.S. through a series of modest acquisitions. S&P says this strategy is challenging to execute because it does not buy the bank a leading market share in any area, nor does it yield many opportunities for efficiencies.
Nevertheless, combined with the earlier acquisitions of Prism Financial, Security First National Bank, Bull & Bear Securities, and Liberty Life, the Dain Rauscher acquisition serves to fill out a more complete set of product offerings for the U.S. market. S&P says ff the integration risk of these acquisitions is managed well and the acquired institutions can be made to cross-sell each others’ products, the returns would justify the investments made.
S&P says the outlook for the bank remains stable. Economic capital should improve over the near term, as profit accumulation outpaces modest loan growth. The bank’s profitability is likely to improve as a result of cost-cutting moves and a healthy Canadian economy. The offset will be continued reserve building and investments to develop certain business lines, which produce a longer-term benefit, S&P says.
-IE Staff