Just Another Big Deal in the Banking Sector

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.

Different strokes
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.

For investors
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.

If you'd like to stay up to speed on the top news and analysis on PNC, Royal Bank of Canada, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Neha Chamaria does not own shares of any of the companies mentioned in this article. 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.


Read/Post Comments (0) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1513553, ~/Articles/ArticleHandler.aspx, 10/25/2014 7:04:46 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement