Royal Bank Of Canada: 'El Royal With Cheese' In The U.S.

| About: Royal Bank (RY)
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RY's CNB presentation highlights its aggressive US expansion with a focus on HNW.

CNB could be transformative to RY by expanding wealth management footprint in key cities, cross-selling Canadian and US products and delivery long-term shareholder value.

Remain bullish on RY on strong domestic position and attractive US growth outlook.

The author recently attended RBC's (NYSE:RY) City National Bank Investor in Toronto to learn about how CNB could transform RY's US operation by strengthening RY's lending business, focusing on existing high-end Wealth Management clients, cross-selling US and Canadian products (particularly in Capital Markets where RY has been hiring aggressively to build its US franchise) and deliver long-term shareholder value. Currently CNB is roughly 4% of RY's overall adjusted earnings, a small percentage indeed but I believe that RY could see considerable runway in the coming years if the above objectives are met. Overall, I remain bullish on RY. The stock is one of my two top picks amongst the Canadian banks with the other being TD (NYSE:TD). I see these two banks to be better positioned than the other Canadian banks given the uncertainties over the Canadian housing market, credit outlook and digital disruption (see - Canadian Banks: Time To Short).

I believe that CNB is strategic and could be transformative to RBC similar to what Royal Trust (which oversaw mutual funds and asset management) and Dominion Securities (investment banking and advisory) did to RY in the earlier days. Canadian banks M&A's track record has been a mixed bag with both positive and negative impact on long-term operating performance of the bank. Examples of this included TD buying Canada Trust to become what we know as TD Canada Trust, RY's failed attempt to buy London Life and BMO's sale of its position in Mexico's largest bank, Bancomer.

RY's acquisition could have significant operating impact on the bank in several ways. First, CNB's high net worth client could be valuable to RY given its strategic positions in NY, LA and SF that combined makes up a market that is 5x larger than all of Canada. CNB's market share is strongest in LA where it has 5% market share but there could be more upside in NY and SF where CNB has less than 1% market share. RY's asset management, insurance and broker dealer could appeal to the HNW clients that CNB specializes in. Second, RY will focus on integrating CNB onto the overall platform but will also focus on preserving the CNB brand with no headcount reduction. Finally, CNB gives RY a good initial foothold in the HNW base, which RY can expand by making tuck-in acquisitions overtime to complement CNB's operational base.

Management has set an aggressive objective for the next four years with pre-tax earnings targeted at a 22% CAGR to $1-1.1b from $400m. Organic growth could contribute to $200m and synergy is expected to be around $210m with the rest $250-$300m reflecting the higher US rates. For this year, RY targets $350m in earnings, which I see to be conservative if we annualize CNB's Q2 earnings which comes to $335m.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.