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RBC studies sale of U.S. retail bank

Royal Bank of Canada (RY-T) is contemplating selling its U.S. consumer and business banking operations, a source tells The Globe and Mail.

No deal is in place but Canada’s largest bank is taking a serious look at its options for dealing with its struggling U.S. lending business, which has been the bank’s largest headache in recent years. Those options include an outright sale.

Royal Bank made its first real move into U.S. retail banking roughly a decade ago, when former CEO John Cleghorn paid $2.3 billion US for Centura Banks Inc. At the time that deal, for 241 branches, was the largest foreign acquisition that a Canadian bank had ever made.

But Canadian lenders have long struggled in the U.S. banking market, where, unlike Canada, thousands of banks go head-to-head, and Royal Bank was no exception. In recent years chief executive Gordon Nixon sought to turn around the operation, and remained undecided about whether the ultimate move would be to sell it. The U.S. Southeast, where Royal’s operations are based, was disproportionately hit by real estate pain during the financial crisis.

RBC reports figures for the U.S. bank under its international banking division, which includes the bank's operations in Trinidad and Tobago. Last month, RBC said the division, which is mostly comprised of the struggling U.S. operations, made $24 million in the first quarter. That compared to a loss of $57 million a year ago. The international banking division accounts for 8.3 per cent of RBC’s revenue.

The profit in the first quarter for that division marked the first time since the beginning of the crisis nearly three years ago that it made money, although the troublesome lending operations in the U.S. southeast did not show a profit yet, RBC said.

“I think it's a sign of steady improvement,” said RBC chief executive officer Gordon Nixon said in early March, adding that the bank is starting to see “some stabilization” in the U.S. credit environment.

Canaccord Genuity analyst Mario Mendonca said Nixon has been signalling of late that an effort to sell the U.S. operations was likely.

“It makes a lot of sense if you listen to the way the CEO has been talking about the U.S. retail business for some time,” Mendonca said. “He’s suggesting that [RBC] needs to improve the business there on its own first so that it gives them the flexibility to pursue strategic alternatives. And what that means is sell it or buy something else to strap onto it.”

Compared to rivals such as TD, RBC has not been as optimistic about the U.S. market.

“[Nixon] has also said things like the U.S. retail banking business is a very tough business. The uncertainty on the regulatory side makes it particularly challenging. So he’s made it sound like a sale was likely,” Mendonca said.

RBC's decision is in stark contrast to Bank of Montreal's current path. In December BMO shelled out $4.1 billion US in stock for midwestern bank Marshall & Ilsley Corp. That deal added $52 billion in assets and more than doubled its U.S. branches to nearly 700. At the time, the purchase was viewed as a way to close the gap with Toronto-Dominion Bank's and RBC's much larger U.S. retail operations.

But M&I also had troubles stemming from commercial real estate loans made at the height of the financial crisis and the bank had not turned a quarterly profit since September 2008. When the takeover was struck, M&I wasn't expected to return to the black until mid or late 2011.

With files from Tim Kiladze 

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