Royal Bank of Canada to buy Ally auto finance unit

TORONTO Tue Oct 23, 2012 3:50pm EDT

A Royal Bank of Canada (RBC) logo is seen at a branch in Toronto November 9, 2007. REUTERS/Mark Blinch

A Royal Bank of Canada (RBC) logo is seen at a branch in Toronto November 9, 2007.

Credit: Reuters/Mark Blinch

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TORONTO (Reuters) - Royal Bank of Canada has agreed to buy the Canadian auto finance and deposit arm of Ally Financial Inc in a $4.1 billion deal to expand its auto-lending business at a time when its mortgage-lending business is facing slower loan growth.

RBC, Canada's largest bank, said on Tuesday the deal will nearly double its commercial auto lending business, making it a leader in the Canadian segment with about C$24 billion ($24.18 billion) in receivables.

It will also expose RBC to a relatively low-risk business that lends at wider margins than does its consumer mortgage business, which provides the bank's main revenue stream and one that has begun slowing as Canadian borrowers try to cut debt.

"It's a stable business with a low loan-loss profile, and that's always what you're looking for in an acquisition," Dave McKay, RBC's group head of personal & commercial banking, told Reuters in an interview. "Canadians pay off their car loans."

RBC expects the Ally Canada business to generate about C$120 million in net income on a standalone basis within the first 12 months after closing, while modestly boosting RBC's earnings per share.

Detroit-based Ally, majority-owned by the U.S. Treasury, outlined plans in May to sell its international operations, aiming to speed up repayment of government bailouts during the financial crisis.

The company is the former auto lending arm of General Motors Co. Last week it agreed to sell its Mexican insurance business to ACE Ltd for $865 million.

Ally, once known as GMAC, received $17 billion in bailouts from the U.S. government during the financial crisis. Including dividend payments, it has paid back $5.8 billion.

With about one-third of its bailout repaid, Ally has said the sale of its international operations would allow it to pay back another third.

RBC said its cash outlay on the deal would be between C$3.1 billion and C$3.8 billion, as it is contingent on the size of the dividend that Ally intends to extract from its Canadian business before closing. The bank said its investment net of excess capital will total C$1.4 billion.

Ally expects to receive total proceeds of about $4.1 billion from the sale.

STRUGGLING FOR GROWTH

While Canadian banks still churn out steady profits, they have been struggling lately to spur growth in the face of slowing mortgage growth and narrow interest margins.

This has forced the country's big banks - for which mortgage lending is their largest business - to look to other avenues.

"They're going to have to find growth somewhere and it's not going to come through the mortgage channel. I think it's going to be outside of that in some of these non-traditional channels," said Tom Lewandowski, a St. Louis-based analyst at Edward Jones.

With limited growth options at home, the Canadian banks have also been looking abroad for assets.

In a separate deal announced on Tuesday, rival Toronto-Dominion Bank said it had struck a deal to buy Target Corp's $5.9 billion credit card portfolio.

TD also was involved in bidding for the Ally business, a source told Reuters on Monday.

Shares of RBC were down 1.7 percent at C$57.01, retreating along with other Toronto-listed financials after the Bank of Canada held its key rate at 1.0 percent and softened its bias on an interest rate increase. filed for bankruptcy in May in a bid to protect the parent company from lingering liabilities tied to home loans it sold to investors during the housing boom.

An auction for ResCap's mortgage servicing and lending operations begins on Tuesday in New York. A consortium of Ocwen Financial Corp and Walter Investment Management Corp is vying with Nationstar Mortgage Holdings Inc to buy the business, sources told Reuters last week.

(Reporting By Euan Rocha Cameron French in Toronto, additional reporting by Rick Rothacker in Charlotte, N.C.; Editing by Steve Orlofsky)

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