Business·Analysis

Canada's banking bet on the world's 1%: Don Pittis

The latest financial results show Canadian banks continue to make out like bandits. But if fears of continued weakness in resources and property come true, there is a new source of income on the way: Hollywood and the world's rich.

Whether they realize it or not, Canadian pensioners are taking a stake in the world's rich

Investing in Hollywood: The Royal Bank of Canada has bought City National, traditionally known as the banker to the stars. RBC plans to expand the bank. (Reuters)

The Bible tells us the poor will always be with us. But if you have a stake in RBC  — and odds are you do — you'd better hope the same thing applies to the rich.

After backing out of an unsuccessful foray into U.S. storefront banking that served ordinary Americans, the Royal Bank of Canada is betting instead on the world's one per cent.

Shortly after its official year-end on Oct. 31 when RBC earned a record $10 billion, the Royal took possession of City National, Hollywood's banker to the stars. And it's bent on expansion.

Royal isn't the only Canadian bank investing in the U.S.

TD Bank, which reported a $1.84-billion quarterly profit this morning, now has more business south of the border than in Canada. Wealth management is a big part of its portfolio.
A City National Bank office in downtown Los Angeles earlier this year. Analysts say Royal is investing in the U.S. bank as a hedge against a declining Canadian economy. (Reuters)

But Royal's specific strategy of focusing on the rich and famous — just rich will do — is unique. And it expects the move to be profitable. The bank announced in January that it would pay $5.4 billion US for City National, but RBC's year-end report issued yesterday refers to the U.S. acquisition in the future tense. 

That's because the deal only went through at the beginning of November after the 2015 year-end.

'Withering growth' in Canada

Some analysts see the move into the high-net-worth sector as a hedge against a sinking Canadian resource economy. That seemed eminently reasonable yesterday as oil was slipping below $40 US a barrel.

According to the Wall Street Journal, the Royal Bank was looking to expand south "in the face of withering growth prospects at home." In its results statements yesterday RBC is officially far less pessimistic about the Canadian economy than the Wall Street Journal.

With its purchase, the bank has latched onto some florid history.
Frank Sinatra, here on a commemorative U.S. stamp, got ransom money from City National when his son was kidnapped. Sinatra's testimonials encouraged other stars to become bank customers. (Reuters)

When Frank Sinatra's son was kidnapped in 1963 following a dispute over a casino, he turned to City National for the ransom money — in marked bills. Frank Jr. was returned unharmed and the marked money helped track down the kidnappers.

Sinatra's endorsement encouraged other Hollywood stars to come to the bank.

Dancing in the vault

More recently, in July 1979, Michael Jackson held a dance party for 300 in City National's Beverly Hills vault to celebrate his gold and platinum albums.  

The Royal Bank may be buying a little glamour, but it isn't planning to just sit on a safe investment. According to the Los Angeles Times, as of 2012 City National recorded a profit every quarter for 191 years.

Instead RBC wants to expand its well-heeled customer base. City National is already established in New York, L.A. and San Francisco.

"The combined high-net-worth population of these three markets is over 4½ times the entire high-net-worth population of Canada," RBC chief executive Dave McKay said on a conference call when it announced the deal.

The bank wants to grow into other places with a lot of rich people such as Houston and London.

And whether or not they approve of the one per cent, Canadians of all walks of life will benefit if McKay's strategy turns out to be profitable.

Not only is RBC the largest asset in most Canadian stock portfolios, it is the biggest single block of shares in the Canada Pension Plan investment fund, worth over $1 billion. The Quebec pension plan holds $1.3 billion worth of RBC shares.
The Royal Bank of Canada must keep its capital ratio at 10 per cent, according to international rules. That means it must expand its core capital to cover the outstanding loans of its new American purchase. (Reuters)

The purchase of City National will affect RBC's overall banking plans. As the bank said in its earnings release yesterday, "we continued to strengthen our capital position for the acquisition of City National Corporation."

According to international banking rules, RBC needs to keep 10 per cent of its assets in cash. 

The bank's startling 2015 results mean that as of its year-end, RBC was already well on its way to increasing its core assets to cover City National's additional multi-billion-dollar loan portfolio.

We'll get a better idea of whether the strategy to profit from the rich is working in the Royal Bank's next set of results.

Follow Don Pittis on Twitter @don_pittis

​More analysis by Don Pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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