Royal Bank of Canada isn't giving up on U.S. consumer banking even after Canada's largest lender took a C$1.57 billion ($1.57 billion) writedown on the sale of its money-losing U.S. bank.
Royal Bank is looking for ways to re-enter the consumer lending business in the U.S. through acquisitions and partnerships in payment systems, as well as expanding its Internet bank, said David McKay, group head of personal and commercial banking.
The push follows RBC's failure to make inroads in U.S. consumer banking after almost 11 years of building on its $2.16 billion purchase of Centura Banks in 2001. Royal Bank sold its North Carolina-based RBC Bank and credit-card assets in March to PNC Financial Services Group Inc. for $3.62 billion.
"We had the wrong franchise for what we needed to do, and we got an albatross off our back," McKay, 49, said yesterday in an interview at Bloomberg's Toronto office. "We're liberated to think creatively now."
McKay called the U.S.-based bank a "painful" learning experience that may ultimately help the Toronto-based company.
The bank will take those lessons and "see if there's a path forward," McKay said. "But we don't feel any pressure to have to do something because we have very strong franchises. We want to be opportunistic and smart."
John Kinsey, who helps manage about C$1 billion of assets at Caldwell Securities Ltd. in Toronto, remains skeptical of Royal Bank's return to U.S. consumer banking.
"I think you have to show me, because they didn't do well in the U.S.," Kinsey said in an interview from Toronto. "Royal had said that, after they pulled out of the U.S., their focus was going to be on international and wealth management, and those are two banking areas where they have expertise."
Royal Bank rose 0.3 percent to C$61.63 at 9:48 a.m. in Toronto trading. The bank has risen 2.9 percent this year, outperforming the eight-member Standard & Poor's/TSX Commercial Banks Industry Index.
Canadian lenders have mixed strategies on U.S. consumer banking. Toronto-Dominion Bank, the country's second-largest lender, has spent more than $25 billion since 2004 building a U.S. branch network that spans from Maine to Florida. TD Bank is now targeting corporate banking in the U.S. with a focus on "mid-tier" companies. Bank of Montreal, Canada's fourth- biggest bank, ramped up its U.S. presence by buying Wisconsin lender Marshall & Ilsley Corp. in July 2011 for $4.1 billion, building on a Chicago-based Harris Bank franchise it bought in 1984.
Bank of Nova Scotia, the country's third-largest lender, never ventured into U.S. consumer banking while Canadian Imperial Bank of Commerce, the fifth-biggest bank, closed an electronic banking platform in the U.S. known as Amicus in 2002 after an expansion failed.
Royal Bank may build off its U.S.-based Internet bank, which currently caters to Canadians living and working in the U.S. and has more than 150,000 customers, said McKay, who has worked at the bank for more than 20 years.
"The world of banking is rapidly changing, it's over- branched," McKay said. "With the technology changes that are happening in the U.S., there are a number of non-traditional opportunities there to lever a virtual bank that are quite exciting."
Royal Bank has a unique opportunity and time to look at the U.S. and mull partnerships to "take a more disruptive approach to the U.S. marketplace" rather than the more traditional approach, said McKay, who has an MBA from the Western University's Richard Ivey School of Business and a bachelor's degree in mathematics from the University of Waterloo.
McKay anticipates future growth in areas of mobile banking and online commerce, giving banks the opportunity to play a key role in areas such as payment systems.
"That's the mandate I'm moving forward with, is to look at the U.S. with a completely different lens," McKay said. "We're sitting back and looking at the opportunity to do something in a non-traditional way."
Royal Bank earned 54 percent of last year's record profit from personal and commercial banking, according to financial statements. Annual profit from the consumer-lending unit was C$4.09 billion, up 9.3 percent from 2011, as balances for residential mortgages, personal loans and deposits increased.
Canadian banking comprised 93 percent of revenue for the unit last year, with the Caribbean and U.S. banking making up the balances.
McKay said he's not happy with the performance of the Caribbean banking business and he may consider cutting jobs, trimming costs and leaving some markets.
"You've got challenged economies, challenged consumers and challenged business clients," McKay said. "Having said that, we observe that some of our competitors in the market are able to make a profit, so there are operating model improvements that are certainly obvious that we need to pursue."
Royal Bank is also seeking ways to expand its personal and commercial banking business to counter an expected consumer slowdown in Canada.
The bank is partnering with retailers including Target Corp. and Shoppers Drug Mart Corp. for banking and credit-card products. The bank plans to add features for its Shoppers Optimum MasterCard such as offering reward points for buying RBC travel insurance starting in February and, later, switching mortgages to Royal Bank, McKay said.
Royal Bank plans to open smaller urban "stores," each one about a quarter of the size of a regular branch and employing five people, after the opening of a mini-branch in Montreal.
Royal Bank will continue to add 20 to 25 branches a year, McKay said. Branch growth in Canada has climbed each quarter, from 1,211 branches as of April 30, 2011 to 1,239 by Oct. 31 last year, according to financial statements.
McKay reiterated his estimate that mortgage growth for the banking industry will slow to about 3 percent to 4 percent, and Royal Bank will outperform the marketplace. The bank is turning to higher-margin areas such as commercial lending and credit cards to help offset the slowdown.
"We are heading into a slower growth consumer market, there's no doubt and the signs are everywhere," McKay said. "We cannot expect the consumer lending part of the business — which has carried the Canadian banks for the better part of the last five years — to contribute as much as it has to growth as we experienced over the last five-plus years."