Royal Bank playing catch-up

By Rory Rostant Thursday, October 11 2007

Royal Bank is trying to catch up with Canadian rivals in the Caribbean.

Royal Bank, which has 46 branches in Caribbean countries such as the Bahamas and Cayman Islands, is also taking advantage of a soaring Canadian dollar to expand in that region, joining Bank of Nova Scotia and Canadian Imperial Bank of Commerce.

“Canadian banks are strong in the Caribbean,’’ said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc in Toronto, which manages $4.3 billion, including Royal Bank shares. “They have a good history in that area.’’ RBTT has $7.5 billion in assets, employs 5,400 and serves 1.3 million clients. Its acquisition will boost Royal Bank’s Caribbean assets to $13.7 billion, spread out across 130 branches and 18 countries. W Holding Company Inc, the owner of Westernbank Puerto Rico, is the biggest bank in the Caribbean, with assets of about $17.5 billion as of March, Royal Bank said.

“The acquisition is advantageous in that it expands Royal Bank’s presence in the growing region at a time when there are becoming fewer reasonable targets,’’ Dundee Securities Corp analyst John Aiken said in a note to clients.

Scotiabank runs more than 200 branches there, and last year the Toronto-based bank spent $56 million to buy Jamaica’s Dehring Bunting & Golding Ltd. CIBC has spent $1.3 billion since last year to increase its stake in Barbados-based FirstCaribbean Bank to 91.4 percent. Adding RBTT also may allow Royal Bank to expand to Latin America, said Peter Armenio, head of US and international banking for the bank.

The transaction provides a platform for future expansion beyond the Caribbean, “as we start to took at other places around Central and Latin America where we do have other businesses,’’ Armenio told analysts on a conference call last week.

RBTT has Canadian roots. It was incorporated in Halifax, Nova Scotia, in 1856 and was owned by Royal Bank before the lender sold control in 1986, said Brad Smith, an analyst at Blackmont Capital in Toronto.

“We believe this renewed commitment would signal the emergence of a new, capable market competitor,’’ Smith wrote in an October 1 note to clients. RBTT was ranked first in Trinidad and Tobago for capital adequacy by financial publication the Banker, according to RBTT’s website. In April, RBTT said it was considering a possible combination or partnership for its business, according to its website. Royal Bank said its offer is 18 percent more than the closing price of RBTT shares on September 28.

Meanwhile, the strength of the Canadian dollar, also known as the loonie, is luring Canadian companies to make deals south of the border, and more acquisitions are expected, analysts said.

Last week, Canada’s two largest banks said they will spend more than US $10 billion to acquire banks in the United States and the Caribbean. TD Bank’s acquisition of Commerce Bancorp Inc for US$8.5 billion in cash and stock doubles its presence in the US.

The Royal Bank of Canada has said it will pay US $2.2 billion in cash and stock to acquire RBTT Financial Group, Trinidad’s largest bank. A Canadian dollar that’s at par with the US greenback is allowing Canadian banks to make large acquisitions for lower prices than they would have paid years ago. The Canadian dollar hit a 31-year high of $1.0093 last Monday and touched as high as 99.95 US cents the following day. Just five years ago the dollar hit a record low of 61.79 US cents.

“TD has very aggressively taken advantage of the low US dollar, and the valuation discounts that the US financials have been trading on,” said analyst John Aiken, an analyst at Dundee Securities in a note to clients.

Aiken added — in capital letters in his report — that he “would not be surprised to see other Canadian financial institutions make large acquisitions in the US in the near term.” Canada’s five major banks dominate the Canadian financial market, but the federal government has not allowed them to merge in recent years because of their large size and record profits.

They have been expanding outside of Canada, instead.

“There are very few substantial opportunities to grow domestically so they have to look beyond the border,” said Brad Smith, an analyst with Blackmont Capital. “They’re generating large amounts of capital each quarter, and each year from their domestic market, and they have a choice, they can either give it back to the shareholders or they can use it to invest in long term growth strategies, which is what you are seeing with the TD purchase.”

TD Bank CEO Ed Clark said the deal makes TD the continent’s fifth-largest bank by deposits with US$312 billion , and seventh-largest by number of branches with 2,100 locations.

“With this deal we have achieved critical mass in the United States,” Clark said. Commerce Bancorp has 15,000 employees at 460 branches in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, D.C., Virginia, Maryland and southeastern Florida.

TD, with over 1,000 branches in Canada, already owns New England-based TD Banknorth, as well as a large stake in the TD Ameritrade US brokerage.

TD is Canada’s second largest by stock market capitalisation — $52.2 billion while Royal



Bank is Canada’s largest at US$71.4 billion. Royal Bank has said the RBTT transaction will create one of the widest banking networks in the Caribbean, with a presence in 18 countries and territories. Royal Bank is also growing rapidly in the US Southeast through its Centura unit, agreeing in September to acquire Alabama National BanCorporation for US$1.6 billion billion.

Canadian lenders have spent more than $7.5 billion in global takeovers this year after the Canadian dollar climbed to parity with the US currency for the first time since 1976.