DBRS Comments on RBC’s Full Ownership of RBC Dexia

DBRS has reviewed the announcement made by the Royal Bank of Canada (RBC or the Bank) that it will acquire the 50% stake of RBC Dexia Investor Services Limited (RBC Dexia) that RBC does not already own. There are no rating actions as a result of this announcement.

The transaction is consistent with RBC’s stated strategy of growing its wealth management businesses. DBRS views RBC Wealth Management, a segment of RBC, as a key element of the Bank’s growth strategy. Integration risk is manageable given RBC’s familiarity with the RBC Dexia operations through its 50% ownership since 2006.

RBC’s reputation, brand and financial strength should help RBC Dexia maintain and attract clients going forward. RBC Dexia provides the Bank with a stable, diversified revenue stream that is not capital intensive as well as leverage against the ongoing trend of outsourcing custody operations, and offers potential cross-selling opportunities.

RBC is paying approximately Canadian $1.1 billion in cash. The transaction is expected to result in a modest accretion to earnings in 2013 but it will reduce RBC’s Tier 1 capital ratio, which was 12.2% at the end of Q1 2012, by approximately 25 basis points immediately following the close of the acquisition. The deal is subject to closing conditions, including regulatory approvals, and is expected to close in mid-2012.

RBC will take an after-tax charge of approximately $200 million, with $170 million (after tax) of that owing primarily to a write-down of intangibles as a result of revaluing the 50% of RBC Dexia that is already owns. The other $30 million (after tax) represents RBC’s share of a loss related to an exchange of securities at RBC Dexia.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations, DBRS Criteria: Rating Bank Preferred Shares and Equivalent Hybrids , and DBRS Criteria: Intrinsic and Support Assessments, which can be found on our website, www.dbrs.com, under Methodologies.

The source of information used for this rating includes Royal Bank of Canada.