The chairman and chief executive of Royal Bank of Canada's U.S. retail bank is downplaying speculation that the Toronto company is poised to step up bank acquisitions here, saying it has some groundwork to do before it makes a deal.
Scott Custer said his $33 billion-asset Raleigh unit, RBC Bank, has identified "a lot of things behind the scenes" that need to be upgraded, including its commercial loan system and centralized retail lending fulfillment. "We are doing that today."
Those two upgrades could take up to 24 months, he said in an interview last week.
"We have some work to do on our foundation to get to a platform that can support more growth if something were to come along," Mr. Custer said. "We must position ourselves so that, if we do grow, we can create leverage in the resulting entity."
RBC has already completed other projects. Last year it replaced its front-end sales and service platform at a cost of about $50 million.
Mr. Custer made his comments two weeks after Darko Mihelic, an analyst at Canadian Imperial Bank of Commerce's CIBC World Markets Inc., said the $619.4 billion-asset Royal Bank could buy a large regional banking company easily over the next 12 months. In a research report, Mr. Mihelic identified Regions Financial Corp. of Birmingham, Ala., and BB&T Corp. of Winston-Salem, N.C., as possible targets.
Bob Denham, a spokesman for the $136 billion-asset BB&T, said last week it is "as committed today as we've ever been to remaining independent." Calls to the $144 billion-asset Regions were not returned.
Royal Bank has spent more than $8 billion since 2000 to amass 450 bank branches in the Southeast, and buying either company would increase that network significantly. BB&T has more than 1,500 branches. Regions has roughly 1,900.
In his note, Mr. Mihelic estimated that Royal Bank would need to pay $13.2 billion for Regions and $20.9 billion for BB&T. In an interview last week, he said he believes Royal Bank could pull the trigger on either purchase, regardless of where it is with its internal systems.
"They would probably be buying a bank with superior systems, so that argument doesn't make any sense," he said. Royal Bank could be "warming up to acquisitions," particularly if more U.S. companies find themselves in need of capital as credit quality worsens.
Mario Mendonca, an analyst at Genuity Capital Markets, said he is not convinced any Canadian banking company is ready to become more aggressive with U.S. bank acquisitions.
"We don't know when this credit crisis will be over," Mr. Mendonca said. "Canadian bank CEOs don't want to buy something if there are enormous charges to come. Though they have a lot of capital, they're not willing to sacrifice capital strength just to do a deal."
He also said Royal Bank has a good vantage point to gauge the U.S. economy, though that means it is working through issues tied to its own exposure to things such as home builder finance.
Rising U.S. credit costs and capital markets writedowns have taken a toll on Royal Bank's returns. It said May 29 that its U.S. banking and capital markets operations swung to a $132 million loss in its fiscal second quarter, which ended April 30, versus a $183.7 million profit a year earlier. The company has stopped making home builder loans in most U.S. markets where it has no branches.
Mr. Custer said consumer products such as home equity and certain types of commercial loans are under pressure in the United States. "We have a swimming pool company, for instance, whose business is way off." By and large, the commercial portfolio is holding up fine, along with nonresidential commercial real estate, "but I don't know if there are any real bright spots today."
RBC is noticing weakness in consumer lending and some "fraying around the edges" in its commercial book, particularly in service industries reliant on residential development, he said.
The bank has taken some charges and is selling some loans it inherited when it bought the $8 billion-asset Alabama National BanCorp of Birmingham in February for $1.6 billion, Mr. Custer said. Though he would not provide specifics, Royal Bank said in May that Alabama National had about $500 million of home builder loans.
"Their portfolio has performed fine," Mr. Custer said. "The good thing was that Alabama National didn't have a large consumer portfolio."
He also said that for the most part RBC avoided major hiccups from last month's integration of Alabama National's 45 branches and 140,000 customer accounts in Alabama.
RBC had to reissue some debit cards after converting the 58 branches and 150,000 accounts in Florida and Georgia in April, Mr. Custer said. "That was remedied in a few days. It wasn't a showstopper."
For the most part, RBC has kept key employees from Alabama National, he said. It did lose a team in Naples, Fla., and some staff in Atlanta, but "we've been able to backfill, and the good news about Atlanta is that we had a good-sized bank there already."