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Royal Bank of Canada (RY) Seeks to Lift US Subsidiary Profits
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In an effort to boost profitability at City National, Royal Bank of Canada (RY - Free Report) has injected an undisclosed amount of capital into the Los Angeles-based subsidiary and bought some of the subsidiary’s debt holdings.
Debt securities owned by City National have lost value because of rising bond yields. After making the intracompany transactions, shares of RY have lost 5.6%.
Notably, Royal Bank of Canada acquired City National for $5.4 billion in 2015. Since then, City National has almost tripled its total assets.
However, because of the U.S. regional banking crisis earlier this year, City National posted a $38 million net loss in the May-July quarter.
Thus, the capital injection is a way to stabilize the struggling U.S. subsidiary’s balance sheet and improve its profit margins.
Royal Bank of Canada stated, “An intercompany capital injection has been made into the City National subsidiary, further strengthening the capital and liquidity position of the subsidiary balance sheet, while also being used to pay down higher cost borrowing.”
Earlier this year, the collapse of Silicon Valley Bank and Signature Bank triggered a regional banking crisis in the United States as massive deposit withdrawals placed renewed focus on banks’ financial health amid a rising interest rate environment.
In a normal situation, an increase in interest rates is beneficial for banks. But this time, the fastest rate hikes by the Federal Reserve since the 1980s to control inflation became a problem for banks, big or small.
A host of issues, including recession fears, rising funding costs, the presence of high levels of fixed-rate mortgages and commercial real estate loans, as well as uninsured deposits on banks’ balance sheet, turned the situation out of favor for banks.
Though the situation has stabilized to a great extent, investors are concerned about the stringent regulations that have been recently proposed, which might make it difficult for banks to earn solid profits.
Notably, the capital injection into City National by RY is also just a temporary solution to a bigger problem that is on the cards for the U.S. subsidiary if interest rates continue to be high.
Over the past six months, shares of RY, Canada’s largest bank, have lost 14.8% on the NYSE against the industry’s rally of 3.7%.
Signature Bank and Silicon Valley Bank collapsed this March, following which, they were seized by the Federal Deposit Insurance Corporation and then sold to New York Community Bancorp, Inc. and First Citizens BancShares, Inc. (FCNCA - Free Report) , respectively.
NYCB, through its bank subsidiary, Flagstar Bank, acquired $38 billion in assets and assumed $36 billion of liabilities of Signature Bank, while not buying any digital asset banking, crypto-related assets or the fund banking business. FCNCA assumed Silicon Valley Bank’s assets worth $110 billion, deposits worth $56 billion and loans worth $72 billion.
After the above-mentioned bank failures, First Republic Bank failed in May, which is considered the second biggest bank failure in history. First Republic Bank was acquired by JPMorgan (JPM - Free Report) , which resulted in the largest U.S. bank becoming an even bigger financial behemoth.
JPM bought the bulk of First Republic’s $228 billion of assets and assumed deposits worth $92 billion by paying $10.6 billion. JPMorgan expected the transaction to generate more than $500 million of “incremental net income” annually and complement its wealth business, thereby resulting in increased penetration within the company’s high-net-worth clients.
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Royal Bank of Canada (RY) Seeks to Lift US Subsidiary Profits
In an effort to boost profitability at City National, Royal Bank of Canada (RY - Free Report) has injected an undisclosed amount of capital into the Los Angeles-based subsidiary and bought some of the subsidiary’s debt holdings.
Debt securities owned by City National have lost value because of rising bond yields. After making the intracompany transactions, shares of RY have lost 5.6%.
Notably, Royal Bank of Canada acquired City National for $5.4 billion in 2015. Since then, City National has almost tripled its total assets.
However, because of the U.S. regional banking crisis earlier this year, City National posted a $38 million net loss in the May-July quarter.
Thus, the capital injection is a way to stabilize the struggling U.S. subsidiary’s balance sheet and improve its profit margins.
Royal Bank of Canada stated, “An intercompany capital injection has been made into the City National subsidiary, further strengthening the capital and liquidity position of the subsidiary balance sheet, while also being used to pay down higher cost borrowing.”
Earlier this year, the collapse of Silicon Valley Bank and Signature Bank triggered a regional banking crisis in the United States as massive deposit withdrawals placed renewed focus on banks’ financial health amid a rising interest rate environment.
In a normal situation, an increase in interest rates is beneficial for banks. But this time, the fastest rate hikes by the Federal Reserve since the 1980s to control inflation became a problem for banks, big or small.
A host of issues, including recession fears, rising funding costs, the presence of high levels of fixed-rate mortgages and commercial real estate loans, as well as uninsured deposits on banks’ balance sheet, turned the situation out of favor for banks.
Though the situation has stabilized to a great extent, investors are concerned about the stringent regulations that have been recently proposed, which might make it difficult for banks to earn solid profits.
Notably, the capital injection into City National by RY is also just a temporary solution to a bigger problem that is on the cards for the U.S. subsidiary if interest rates continue to be high.
Over the past six months, shares of RY, Canada’s largest bank, have lost 14.8% on the NYSE against the industry’s rally of 3.7%.
Image Source: Zacks Investment Research
Currently, Royal Bank of Canada carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Digging a Little into the Bank Failures
Signature Bank and Silicon Valley Bank collapsed this March, following which, they were seized by the Federal Deposit Insurance Corporation and then sold to New York Community Bancorp, Inc. and First Citizens BancShares, Inc. (FCNCA - Free Report) , respectively.
NYCB, through its bank subsidiary, Flagstar Bank, acquired $38 billion in assets and assumed $36 billion of liabilities of Signature Bank, while not buying any digital asset banking, crypto-related assets or the fund banking business. FCNCA assumed Silicon Valley Bank’s assets worth $110 billion, deposits worth $56 billion and loans worth $72 billion.
After the above-mentioned bank failures, First Republic Bank failed in May, which is considered the second biggest bank failure in history. First Republic Bank was acquired by JPMorgan (JPM - Free Report) , which resulted in the largest U.S. bank becoming an even bigger financial behemoth.
JPM bought the bulk of First Republic’s $228 billion of assets and assumed deposits worth $92 billion by paying $10.6 billion. JPMorgan expected the transaction to generate more than $500 million of “incremental net income” annually and complement its wealth business, thereby resulting in increased penetration within the company’s high-net-worth clients.