DBRS Confirms RBC Bancorporation (USA) at AA (low); Trend Stable

DBRS has today confirmed the ratings of RBC Bancorporation (USA) (RBC Bancorporation or the Company) and its operating bank subsidiary, including the Company’s Issuer & Senior Debt rating of AA (low). All trends are Stable. The ratings of the Company, a wholly-owned U.S. subsidiary of Royal Bank of Canada (RBC – rated AA with a Stable trend), reflect its important role in RBC’s U.S. strategy and DBRS’s expectation that RBC has the resources and motivation to support RBC Bancorporation if needed. The ratings also take into account the Company’s solid deposit market shares primarily in North Carolina and Alabama and attractive long-term demographics within the Southeast. These strengths are offset by below-peer profitability, significant exposure to real estate-related assets and declining capital metrics.

As a result of RBC Bancorporation’s position in RBC’s overall franchise, DBRS has assigned a SA1 designation to the Company, which implies strong and predictable support from the parent. As a supported rating with a SA1 designation, RBC Bancorporation’s rating will move in tandem with RBC’s long-term debt ratings, which currently have a Stable trend. RBC remains committed to supporting the Company as evidenced by capital injections and managerial support. Additionally, in 2008, the Company was able to transfer approximately $1.4 billion in problematic assets to a different legal entity under the RBC umbrella protecting it from any further adverse developments from these troubled loans. Without parental support, RBC Bancorporation’s ratings would be significantly lower.

The Company benefits from an established community-focused commercial and consumer banking franchise, primarily within North Carolina and Alabama. In total, the footprint covers six Southeastern states and has over 440 full-service banking centers serving the needs of its customers. The six states represent approximately one-fifth of U.S. GDP, which is twice as large as Canada. Expected population growth within this region is higher than the national average, which should provide ample growth opportunities once the economic downturn stabilizes.

In 2008, the Company reported a net loss of $278.7 million driven by significantly higher loan loss provisioning and securities losses. The primary challenge facing the Company is its residential builder finance portfolio. In total, construction and development loans (includes the builder finance portfolio) represented 17.4% of total loans at December 31, 2008. This relatively high concentration will continue to mute earnings until housing prices and inventory stabilize. DBRS notes that RBC has created a separate subsidiary, whose financial statements do not impact RBC Bancorporation’s results, to manage the wind down of out-of-footprint builder finance loans and some impaired in-footprint loans. This portfolio totaled approximately $870 million dollars at the end of January 2009. The recessionary economy has started to adversely impact other asset classes as well including the retail and commercial portfolios. With housing yet to stabilize and rising unemployment, DBRS expects loan loss provisioning to remain elevated over the intermediate term and keep earnings muted.

Other factors contributing to weak financial results include securities losses, a high expense base and a heavy reliance on spread income. The securities losses stemmed from write downs of other-than-temporarily-impaired (OTTI) securities and realized losses primarily from U.S. agency preferred shares. In total for 2008, the Company reported $254.3 million in losses related to its available-for-sale securities portfolio. With valuations still declining, it is likely that RBC Bancorporation could take further OTTI charges. The Company is focused on cutting expenses and improving efficiencies and has made progress on several fronts recently. However, interest rates are likely to remain low, which will hurt the Company’s asset-sensitive balance sheet.

The 2008 net loss and the closing of the Alabama National BanCorporation acquisition in early 2008 have pressured the Company’s capital metrics. Indeed, the Company’s tangible common equity to tangible assets ratio declined to 5.92% from 7.48% during 2008. DBRS notes that as a foreign owned subsidiary, RBC Bancorporation was not eligible to participate in the U.S. Treasury’s Capital Purchase Program. However, DBRS expects RBC to inject capital to support its U.S. subsidiary if needed. While not eligible for the Treasury’s preferred shares investment, the Company is participating in the FDIC’s Temporary Liquidity Program and Transaction Account Guarantee Program, which should help funding and liquidity.

Headquartered in Raleigh, North Carolina, RBC Bancorporation (USA) reported $32.4 billion in assets as of December 31, 2008.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.