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A flurry of new deals have popped up in the financial industry. After Capital One's (NYSE: COF ) announcement to buy ING's (NYSE: ING ) U.S. retail operations for $9 billion last week and Citigroup's recent deal to sell its private equity portfolio to AXA Private Equity for $1.7 billion, now it's PNC's (NYSE: PNC ) turn to make a purchase. PNC has agreed to buy the U.S. retail operations of Royal Bank of Canada (NYSE: RY ) for $3.62 billion.
The deal will give RBC a welcome exit from a not-so-profitable business segment predominantly in the southeastern U.S., meanwhile allowing PNC to expand into the region with relative ease, which it clearly wants to do.
PNC's expansion strategy
Beating regional rival BB&T (NYSE: BBT ) in the race for RBC is something to celebrate as well. Both banks were vying for the unit.
For PNC, the deal looks like a good bargain as $3.45 billion (excluding the $165 million that PNC will pay for related credit card assets) represents a small discount to RBC's U.S. bank book value. PNC plans to fund the acquisition through a combination of cash and stock. PNC, following the deal, will get deposits worth $19 billion and loans worth $16 billion.
The biggest advantage to PNC will be the opportunity to expand in the Southeast, where RBC has more than 420 branches in six Southern states. RBC's 83 branches in Florida will help PNC increase its presence by twofold
Expanding on this "go South" strategy, PNC also recently agreed to acquire 19 branches of BankAtlantic Bancorp (NYSE: BBX ) located in Florida. The RBC deal will clearly give it a deeper foothold in that region. The deal will also add to PNC's commercial real estate portfolio.
If RBC's recent survey is anything to go by, consumer confidence has improved remarkably in the Southeastern region in the last quarter. The study suggests that consumers in the region are becoming increasingly optimistic about their financial situation.
I'm quite skeptical about a survey produced by a bank that suggests that the very region they're trying to leave has bright prospects, but PNC, which already has presence in areas like Florida, must have sensed a decent enough future for the region, right?
RBC's loss-kicking strategy
Ultimately, RBC's move may seem a little out of place since it is exiting a larger market where its Canadian rivals are actually expanding. Toronto Dominion (NYSE: TD ) acquired Chrysler Financial in December to expand its auto lending business in North America. Months back, Bank of Montreal agreed to acquire Marshall & Ilsley largely to strengthen its U.S. business.
RBC's venture into the U.S. retail banking space with a 2001 acquisition costing $2.2 billion simply didn't work in the bank's favor.
The Canadian bank had to write down $1 billion in 2009 after the U.S. real estate market collapsed.
RBC, however, is not exiting completely from the U.S. market. RBC will now focus on its wealth management and capital markets segments in the U.S.
All in all, the transaction is expected to result in a loss of around $1.65 billion. With RBC's last quarter earnings also failing to meet expectations, a long-term view on the stock is probably the best thing investors can hope for, as advocated by Fool colleague Zeeshan Siddique.
As for PNC, the deal is expected to add to earnings by the end of 2013. Nevertheless, the Pittsburgh-based bank posted strong quarterly numbers in April, driven by a 44% reduction in provision for credit losses year on year. Solid numbers, a decent dividend, share repurchases, and expansion plans all make the stock worth considering.
The Foolish bottom line
PNC seems to be in an aggressive expansion mode. With the deal fitting into its banking portfolio, investors should keep a watch on the stock. RBC, meanwhile, not so much.
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