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October 10, 2016updated 15 May 2017 10:19am

RBC’s light-touch approach to City National a winning strategy

It was RBC’s biggest ever takeover. In 2015, RBC paid $5.4bn to snap up the iconic City National Bank, the so-called “bank for the Hollywood stars”. Already, the deal is proving to be a winner for both banks. Douglas Blakey writes

By Douglas Blakey

It was RBC’s biggest ever takeover. In 2015, RBC paid $5.4bn to snap up the iconic City National Bank, the so-called “bank for the Hollywood stars”. Already, the deal is proving to be a winner for both banks. Douglas Blakey writes

A few years after selling its US branch network to PNC in 2012, Royal Bank of Canada (RBC) began thinking about how it might re-enter the American banking market.  The bank’s first foray with Centura Bank in the Southeast United States had not been particularly successful, so RBC’s new Chief Executive Dave McKay decided that this time they would look at potential acquisitions through a different strategic lens.

Using that lens, RBC came up with a model acquisition based on more than 20 criteria, including quality of management, profitability, growth potential, existing footprint, and compatibility of culture. Several companies made the final list, but one stood out above the rest – City National Bank in Los Angeles.

The early courtship was not an immediate success, with City National’s Chief Executive Russell Goldsmith initially telling McKay his bank was not for sale.  Mike Dobbins, an RBC executive vice-president who worked on the pitch to City National with McKay, recalls a late-night dinner in 2013 with Goldsmith at a Los Angeles restaurant which did not go as planned.

Nevertheless, a deal was eventually struck and announced in early 2015 following a weekend of final negotiations. Interestingly, those negotiations included far more than price – they also focused on how the combined capabilities should be structured to serve clients in a way that wasn’t previously possible, and would create a powerful platform for long-term growth in the US market.

Learning from its past mistake, RBC decided to take a “light-touch approach” with integration this time around in order to preserve City National’s core value. That process began with the creation of an integration committee with senior representatives from the key businesses and functions from both organisations.

“It all started with a conversation about what we wanted to achieve and how we could do it collaboratively,” explains Dobbins, who served as a facilitator for the integration. “We were buying a great company with great people, so our objective was to make sure it stayed great.”

Goldsmith of City National agrees.

“We both saw this as a partnership that would allow City National and RBC in the US to go much farther, faster with more resources, more expertise and more opportunities than ever before,” he says. “So from the start, we approached the integration from the perspective of what would make a more competitive value proposition for both companies.”

Most of the integration issues were relatively straightforward.  For example, from day one, the key control functions were successfully aligned, and City National’s general ledger was electronically linked to RBC just one week after the deal closed.  Moreover, rather than pushing RBC products and capabilities on to City National, the bank just “opened the company store and said choose the capabilities that make sense for your business,” adds Dobbins.

Even the biggest piece of the puzzle – how to structure the combined US wealth management capabilities – was quickly and amicably resolved. The investment management and advisory services that RBC wealth management offers were viewed as additive and complementary to the wealth management capabilities already in place at City National, so they were combined under Goldsmith’s leadership.

In addition to resolving structural issues, there was also the question of how RBC could earn the desired return on the $5bn it was paying for City National.

To start discussions, RBC gave senior executives at City National a set of financials and goals based on when they expected the acquisition to become accretive to earnings. To their delight, City National executives came back with more aggressive plans on how they could do even better, and sooner.

The fact that teams of people representing both companies would come up with more optimistic plans didn’t surprise Dobbins. After all, RBC was bringing to City National an expanded balance sheet, a higher lending capacity, a capital markets capability and a national wealth management platform and a willingness to invest in growth.  And RBC was gaining enhanced capabilities in private banking, commercial banking, core banking, and trust and planning from City National.

“By working together in a truly collaborative fashion, the teams came to the conclusion that they could make one and one equal three,” explains Dobbins. “We gave them the ingredients, and they used them to make the plan better.”

Indeed, the combination of RBC and City National has created a much more competitive value proposition that is generating more business with current clients and helping both entities win new business. To illustrate the early success, Goldsmith points to an example of how RBC’s financial advisers are helping to generate new commercial banking business for City National.

“On the day of the merger closing, we got a call from financial advisers at RBC who had a personal investment relationship with the principals of a company in Southern California with about $100m in revenue,” recalls Goldsmith. “But the company was not happy with their bank — a rather large, well-known US money centre bank.”

As a result of that introduction and a terrific team effort, City National booked a $15m commercial loan, and several million dollars in deposits. They also issued credit cards to the company’s employees, and signed the firm up for a full suite of treasury management services.

“The client is happy because they’ve improved their banking situation,” says Goldsmith. “The financial advisers are happy because they don’t have this other bank pushing to get their investment assets away from RBC. And City National is thrilled because we were introduced to a new client.”

The combination of City National with RBC has also enhanced their capabilities to serve commercial clients, including those who operate on both sides of the border.  Interestingly, over 90% of RBC’s commercial clients that are globally active are already doing business in the US. Some of them need credit, cash management, or a variety of banking services in the US that RBC really hasn’t been set up to fully provide until its hook-up with City National.

In turn, City National sees increased opportunity to help their clients who do business in Canada, especially those in the entertainment business, through RBC’s Personal and Commercial Banking division.  In the US, the bank also sees plenty of opportunity in the corporate and institutional sector.

Goldsmith explains that as clients of City National get bigger and want to go public or gain access to public debt markets, his bank can now offer them these capabilities through RBC Capital Markets, including complex financial solutions such as the ability to do IPOs or M&A and structured products. Indeed, partnering with capital markets has already enabled City National to take advantage of opportunities with several companies in the entertainment and technology sectors.

As an example, Goldsmith points to a client in the biotech area who was about to do a secondary offering.  “We introduced them to RBC Capital Markets, who got a key position in the offering,” he says.  “RBC received a fee, but we also kept City National in the bank group going forward to preserve and protect what we think is a terrific relationship with a growing company. So, again, the merger has really been beneficial for everyone involved.”

RBC’s larger balance sheet has also enabled City National to increase its lending capacity, which has proven particularly useful with its most substantial clients.

So what has the impact of this early collaboration been to the bottom line?

In the first 180 days after closing, City National experienced balance sheet growth of US$4.5bn. And there is plenty of potential for additional growth, especially in City National’s existing footprint in New York and California, which represents more than $6tr of investable wealth.

Even though City National’s assets have grown considerably over the past few years, its market share in in key markets outside of Los Angeles remains less than 1%. By leveraging the strength of its brand and business model with RBC, Chris Carey, the bank’s Executive Vice-President and Chief Financial Officer, sees significant growth potential ahead.

One example is New York City, which is the largest market outside of California, and in fact, is home to three times more high net worth individuals than all of Canada. In 2002, City National opened its first office in Manhattan with a handful of colleagues largely to serve the entertainment industry and private banking. Today, they have three offices in New York with $5.5bn in loans and deposits and more than 200 colleagues in the city.

Including these and other new initiatives, and the many synergies that will continue to be realised from collaborative efforts and cross selling, the bank is forecasting significant future growth. For example, by 2020, Carey expects City National will generate approximately $1bn of pre-tax income, which is more than double its 2015 results. This translates to a CAGR of over 20% over five years.

With the City National merger looking so bright so quickly, RBC executives have sent a clear signal that they have learned from past mistakes and now know how to successfully integrate a new acquisition.

“From the beginning, we created an atmosphere of transparency and collaboration,” says Dobbins. “We took a light-touch to integration, and empowered our colleagues at City National to keep building an exceptional bank. And we never lost momentum.”

The results of that approach were not lost on City National’s colleagues and clients, many of whom heard positive success stories retold across the organisation, which helped maintain the firm’s high levels of employee and customer satisfaction throughout the integration and beyond.

And City National has been able to recruit a record level of talented employees (City National calls them colleagues) who like the bank’s entrepreneurial spirit combined with the resources of RBC.  In fact, the bank is on a path to grow its employee base by over 15% in 2016 alone.

“The strategic vision that RBC’s Board and its management had when they purchased City National, appears to me today to be even more promising and more exciting than we thought,” concludes Goldsmith. “And certainly more promising than when Dave McKay and Mike Dobbins asked me to dinner back in 2013.”

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