Here’s Why RBC Shouldn’t Sell Its Retail U.S. Business Now

After a decade of futile struggles to secure a foothold, Royal Bank of Canada (NYSE: RY  ) has decided to exit its loss-making consumer banking operations in the U.S. It may be surprising that while its Canadian rivals are focusing on penetrating and expanding into the U.S markets, RBC is shutting its retail business there which it started with the acquisition of Centura Banks in 2001.

JP Morgan (NYSE: JPM  ) is advising RBC on the sale of its operations for which the potential buyers include U.S. Bancorp (NYSE: USB  ) , PNC Financial (NYSE: PNC  ) , and BB&T (NYSE: BBT  ) , according to an analyst cited by Bloomberg. But this is one question RBC’s investors should ask: How viable is this deal for the Canadian bank?

Recovering metrics
The most obvious reason for the action would be to prevent more losses from mounting within RBC’s larger international unit. But let’s delve deeper.

It’s needless to say that the recent years have been anything but good for banks. Thus, bad fiscal performance shouldn’t be an exclusive motivator. And, in fact, a few of RBC’s U.S. metrics actually showed some signs of improvement. While U.S. operations incurred a net loss of $1 billion in 2009, they made a profit of $130 million last year due to declining provisions for credit losses and a goodwill impairment charge last year.

The ugly recession is finally over and the U.S economy is recovering, albeit at a snail's pace. At the moment, RBC is likely to fetch merely a song for its operations here, since normal premiums for retail banks are still a long way off. Besides, as I have already mentioned, competitors such as Bank of Montreal (NYSE: BMO  ) are making their presence felt in America right now. Toronto Dominion (NYSE: TD  ) combined its retail auto lending business by acquiring Chrysler Financial. While RBC is zigging, its competition is zagging and it makes me wonder whether RBC is cashing in its chips at precisely the wrong time.

The Foolish bottom line
Considering all of this, the selling off of its U.S retail unit doesn’t look like a very far-sighted step by RBC. Improving financials of the company complemented by the improving economic condition in the U.S give me a feeling that things may turn around for this retail business. And even if RBC has to get rid of this unit, it should wait for a while before it gets an offer that is worthwhile.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. The Fool owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 12, 2011, at 2:23 PM, 5mackDab wrote:

    Maybe they foresee bigger problems continuing in the US and just want out but I tend to agree with you and hate it when companies pay up for assets and then sell them cheap. Would be interesting if one of the other Canadian Banks mentioned would consider taking them off there hands at the same time as RBC is looking for an exit.

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