April 3, 2012 / 3:48 PM / 5 years ago

RBC to buy full ownership of RBC Dexia

(Reuters) - Royal Bank of Canada (RY.TO) said on Tuesday it would buy the 50 percent stake in custody joint venture RBC Dexia that it does not already own from Banque Internationale à Luxembourg, or BIL, for 837.5 million euros ($1.1 billion).

Canada’s No. 1 bank said the acquisition of RBC Dexia, which safeguards securities for institutional investors, would boost its earnings moderately in 2013. RBC Dexia also handles fund and pension-administration, along with other services for a client base that is spread across the globe.

The Toronto-based bank said it views RBC Dexia as a strong business that generates stable revenue in an attractive sector that is well positioned for long-term growth.

“This transaction is consistent with our overall strategy,” RBC Chief Executive Gordon Nixon told a conference call. “It enhances our position as a leading provider of select financial services in targeted markets and provides additional global diversification.”

“The business is highly complementary to our wealth management and our capital markets segments, with similar market dynamics and a premier institutional client base,” he said.

The announcement came just as the European Union opened an investigation to determine whether the sale of BIL, the Luxembourg-based retail banking arm of bailed-out Franco-Belgian lender Dexia (DEXI.BR), was conducted properly.

Qatar’s al-Thani royal family has agreed to buy 90 percent of BIL through their Precision Capital investment group, with the Luxembourg state taking the remaining 10 percent.

Last year, RBC said it was “examining its opportunities” involving its joint venture with Dexia after the European lender announced that it had started the process of disposing its stake in RBC Dexia.

“This announcement was not a surprise as it had been widely anticipated since the emergence of Dexia’s issues within the context of the European crisis,” Barclays analyst John Aiken wrote in a note to clients.

RBC had a right of first refusal on buying the Dexia stake in the joint venture, which had assets under administration of $2.7 trillion at the end of 2011. RBC Dexia, headquartered in London, has 5,500 employees, who serve clients from offices spread across four continents.

CFTC LAWSUIT

The deal came a day after the U.S. futures regulator, the Commodity Futures Trading Commission (CFTC), filed a lawsuit against RBC accusing it of running a “trading scheme of massive proportion” to gain lucrative Canadian tax benefits.

The lawsuit weighed on RBC’s stock price on Tuesday and shares of the bank, which is Canada’s largest publicly traded company, were down 2.8 percent at C$57.11 in morning trading.

The shares were the biggest drag on Canada’s benchmark TSX Composite Index .GSPTSE, which was down nearly 1 percent at 11.30 a.m. (1530 GMT).

“We certainly reject the (CFTC) allegations as unwarranted,” Nixon said on the call. “This is not a financially material event to RBC, but we certainly take the situation seriously and we intend to vigorously defend our reputation.”

The lawsuit alleges that a small group of senior RBC employees created and managed a “wash trading” strategy in which they improperly coordinated buying and selling of stock futures by bank subsidiaries, without them taking a position in the market, in order to gain the Canadian tax credits.

The suit alleges that the scheme lasted from at least June 2007 to May 2010 and involved hundreds of millions of dollars in trades.

RBC called the allegations “absurd” and said the CFTC and the relevant exchanges reviewed and monitored the trades in question.

CAPITAL RATIOS

RBC said its acquisition of the RBC Dexia stake is expected to reduce its Tier 1 capital ratio slightly, but the impact of this is largely offset by the recent sale of its U.S. retail banking operations.

It said its capital ratios - a key measure of a bank’s financial strength - along with its credit ratings and balance sheet still rank among the strongest of all banks globally.

“The anticipated reduction in capital ratios results in part from the fact that RBC is purchasing the other half of the joint venture below book value,” said Barclays analyst Aiken. “As such, this should ultimately be a successful transaction, assuming that Royal is able to continue to grow the business.”

Due to accounting regulations, RBC said it plans to revalue its existing investment in RBC Dexia to reflect the purchase price being paid.

The revaluation will result in a non-cash loss of about $170 million after tax, primarily reflecting the writedown of intangibles. RBC will record most of the loss in its second quarter.

In conjunction with the deal, RBC Dexia sold 1.4 billion euros in nominal value of Dexia Group fixed income securities to the Dexia Group. In return it bought an equivalent amount of U.S. dollar-denominated securities that consist primarily of notes issued by large global financial institutions.

RBC Dexia will incur a loss from the sale of the Dexia Group securities and RBC’s proportionate share of this loss is about $30 million after tax. RBC said it will also book this loss in the second quarter.

The sale and securities purchase will not have a material impact on RBC Dexia’s capital position.

The acquisition, which is subject to regulatory approvals, is expected to close in mid 2012. Goldman Sachs and RBC Capital Markets served as financial advisers to RBC on the transaction.

($1=$0.99 Canadian)

($1=0.75 euros)

Reporting by Euan Rocha in Toronto; Editing by Frank McGurty; and Peter Galloway

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