George Lewis, head of wealth management for RBCSami Siva
Now that Canadian banks have been cleared by the federal regulator to dip into the billions of dollars of surplus capital they have been storing for the past two years, Royal Bank of Canada is ready to go shopping.
Canada's largest bank has spent the summer laying the groundwork for a series of acquisitions it hopes to complete through its wealth- management division, if banks in Europe and the United States are forced to shed parts of their business to raise capital.
RBC has been hunting for a European wealth management business to buy since the onset of the financial crisis. The bank has been building its wealth management division aggressively since it bought out prized Vancouver-based money manager Phillips Hager & North Investment Management Ltd. in 2008 for $1.36-billion.
George Lewis, head of wealth management for RBC, said in an interview Tuesday that the bank has held talks with several financial institutions in Europe and the U.S. in the past few months to get a sense of what assets might be going up for sale as lenders try to shore up their own balance sheets. While Canadian banks are sitting comfortably on surplus capital, new global banking regulations to be passed in November are expected to leave some international banks in a shortfall, and needing to sell off non-core parts of their businesses.
"We've been very active and pro-active on both sides of the Atlantic," Mr. Lewis said Tuesday.
"Taking the time to reach out directly and get to know management teams [at other financial institutions] even informally, while expressing our interest is very effective," Mr. Lewis said.
The acquisitions would bolster Royal Bank's wealth management division, which is a key priority for its growth. Wealth management has become a top priority for many banks, in part because it relies more on clients' assets than on the bank's own balance sheet to bring in income. It's also a business that will benefit from demographics as the baby boomers age and transfer wealth to their children.
As expected, Canada's financial services regulator this week formally lifted the freeze on capital it put in place for the banks in 2008, asking Canadian financial institutions to preserve excess capital in preparation for more strict global rules. Those rules will be finalized in November and will require banks to backstop their lending and investment operations with higher levels of capital.
Representatives from 27 countries agreed on Sunday at meetings in Basel, Switzerland, that banks should be forced to retain common equity equal to a minimum of 4.5 per cent of their assets, an increase on the old standard of 2 per cent. Banks will also be instructed to add an additional 2.5 per cent buffer to be used during financial shocks.
Some Canadian banks are expected to raise dividends, possibly by the end of the year or in early 2011. National Bank of Canada and Toronto-Dominion Bank are thought by analysts to be the banks most likely to raise dividends first. While RBC is also considered likely to increase its dividend in 2011, it is expected to seek out acquisitions sooner than that.
"The acquisition opportunities we are looking at, hopefully will bring more capabilities in things like global fixed income, global equities, and European fixed income," Mr. Lewis said. "We're looking for [two]things in an acquisition - both an expansion of our investment management capabilities, but also access to a broader range of clients that that firm would be distributing through already, whether it would be pension plans in the U.S. or Europe."
RBC has been hiring in its global wealth management division, adding hundreds of staff and pushing further into emerging markets. RBC ranked for the first time this year as a Top 10 player among global wealth managers, coming in at No. 7 on the list compiled by London-based Scorpio partnership.
Meanwhile, Bank of Montreal could also be poised to make an acquisition, though a small one. Crain's Chicago Business, an Illinois newspaper, reported BMO is on a list of potential bidders for struggling Wisconsin lender AnchorBank, which has 55 branches and $4-billion (U.S.) in assets. A BMO spokesman declined to comment.
Though Canada's Office of the Superintendent of Financial Institutions has lifted the freeze on banks' capital, it is expected none of them will rush to deploy the funds. They will likely wait until November G20 meetings, where the final draft of the new rules will be ratified, including different definitions of capital the banks must keep on their books.
With a file from reporter Tara Perkins