Royal Bank buys full ownership of RBC Dexia for $1.1B

The Royal Bank of Canada will pay $1.1 billion cash to buy remaining half of RBC Dexia, an advisor to pension fund managers and institutional investors.
The Royal Bank of Canada is buying the remaining half of RBC Dexia it did not already own for $1.1 billion as the French-Belgian bank continues to suffer from the European debt crisis. (Timothy Neesam/CBC)

Royal Bank of Canada said Tuesday it will pay $1.1 billion in cash to buy the remaining half of RBC Dexia, an adviser to pension fund managers and institutional investors, it doesn't already own.

The Canadian bank's acquisition of the 50 per cent stake will give it full control of the French-Belgian bank, which has been in financial trouble since the onset of the credit crisis.

Royal Bank's partner, formerly called Dexia Internationale a Luxembourg SA, had indicated months ago it would sell its half of the joint venture and RBC announced in October it was in talks to acquire full control of RBC Dexia.

Dexia, which has been renamed Banque Internationale a Luxembourg SA, is one of the victims of the European debt crisis and the 2008 credit crunch sparked by the failure of Lehman Brothers, a Wall Street investment bank.

Dexia SA was the first major European bank to need a bailout in 2011 as a result of concerns over the sovereign debt crisis. It formed the partnership with Royal bank about six years ago.

Royal Bank chief executive Gord Nixon told analysts on a conference call that the timing of the acquisition and its price were both "very attractive" for the bank.

"Our long history in the global custody business provides us with an in-depth understanding of its strong fundamentals and the opportunities it provides for growth," he said.

RBC Dexia provides a range of products and services — from fund and pension administration to securities lending and shareholder services, but part owner Banque Internationale ran into financial troubles and has struggled to recover.

Bailouts from Luxembourg, Belgium and France last year were designed to rescue its operations by pledging billions of dollars to help nationalize the struggling bank.

The acquisition of RBC Dexia "allows us to be much more aggressive going after new business," said Jim Westlake, group head of RBC's international banking and insurance operations.

"This is a business that we really like and it's a great fit with out global growth strategy with wealth management."

Barclays capital analyst John Aiken highlighted that Royal Bank expects to have reduced capital ratios because the transaction for RBC Dexia is being made below the book value.

"As such, this should ultimately be a successful transaction, assuming that Royal is able to continue to grow the business," he wrote in a note.

RBC's definitive agreement to buy the rest of RBC Dexia was announced Tuesday, a day after Canada's largest bank dismissed major allegations of improper trading by a U.S. regulatory agency.

The U.S. Commodity Futures Trading Commission accused RBC on Monday of making hundreds of millions of dollars in sham trades — an allegation the bank vociferously rejected.

Royal Bank called the accusation "absurd" and said it had sought guidance from the CFTC before making the trades and acted within the agency's guidelines.

The CFCT alleged, however, that the Canadian bank concealed the true nature of the trades and made false statements to a futures trading exchange.

The activity, so-called "wash trading" is an illegal stock trading practice in which an investor simultaneously buys and sells shares in a company through two different brokers, usually to help it avoid taxes. Wash trading is illegal in the United States under to futures trading laws.

The CFTC said the bank's trading strategy was devised to gain Canadian tax credits on its holdings of U.S. and Canadian company stocks. It said the strategy was created and carried out by a group of executives at the bank. However, the agency's suit didn't name any individuals.