CHARLOTTE, N.C./TORONTO (Reuters) - PNC Financial Services Group Inc (PNC.N) said on Monday it plans to buy Royal Bank of Canada's (RY.TO) U.S. retail bank operations and credit card business for $3.62 billion, expanding the bank into the U.S. Southeast.
The cash-and-stock deal may be the start of a new consolidation wave among U.S. regional banks. Mid-sized banks are buying competitors to expand into new markets and add customer deposits, allowing them to grow.
"This is the time to be acquiring franchises in these kinds of markets," James Rohr, PNC Financial's CEO, told analysts on a conference call on Monday.
Rohr said he expects fewer small banks to exist five years from now.
Regional banks are acquiring even as the biggest banks, including JPMorgan Chase & Co (JPM.N), are saddled with regulatory woes and housing-related losses that limit their ability to jump into deals.
RBC Bank (USA) has $25 billion of assets and 424 branches in six U.S. states in the Southeast. As of March 31, PNC had 2,446 branches and $259.38 billion of assets.
RBC's U.S. bank was a money-losing operation, but PNC may be able to turn it around by winning more business and corporate clients in the region, dominated by strong U.S. national and regional banks including Bank of America Corp (BAC.N) and BB&T Corp. (BBT.N)
"This deal either works or it doesn't based on PNC's ability to sell commercial lending in RBC's markets," said Marty Mosby, bank analyst with Guggenheim Securities LLP. "They're not getting a full, built-out bank."
James Westlake, RBC's international banking and insurance head, said the Toronto-based bank sold the unit because it lacked the scale to accomplish what the bank wanted to do in the United States.
"We think a bank like PNC can take the assets we have and probably do a lot more with them in the near term than we would have been able to do because they have a much more robust platform in the United States," Westlake told Reuters.
RBC said it will continue to provide banking services to RBC Wealth Management and RBC Capital Markets in the United States. The sale includes the bank, which RBC is selling for $3.45 billion, and a U.S. credit card business, which RBC is selling for $165 million.
The Canadian bank expects the deal to result in a loss of C$1.6 billion ($1.63 billion), which will be recorded in the current quarter. The figure includes an estimated goodwill write-off of C$1.3 billion.
RBC, Canada's largest bank, is offloading the business as some of its rivals are expanding in the United States.
PNC has the option of paying RBC up to $1.0 billion of the purchase price in common stock; $1.0 billion of stock would amount to 3 percent of PNC's outstanding common shares, based on the bank's closing stock price of $57.79 on June 17.
PNC executives said any common stock issuance tied to the deal will depend on the regulatory climate and economic conditions when it closes.
The Pittsburgh-based bank expects to fund the cash portion of the buy with cash on hand, debt issuance and a preferred stock offering.
The purchase price represents a $112 million discount to the tangible book value of the unit.
RBC expects the deal to add to 2012 earnings, while PNC expects the purchase to add to its earnings by the end of 2013 or sooner depending on the stock component of the deal, the companies said in separate statements.
PNC projects it can cut $230 million in annual expenses from RBC's U.S. operations, and is projecting an internal rate of return of more than 19 percent on the bank.
Currently, PNC's retail operations are focused on Midwestern and mid-Atlantic states. With the acquisition, the bank will gain branches in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia.
RBC is selling its U.S. retail banking assets roughly a decade after entering the market through its acquisition of Centura Banks in 2001.
The Canadian bank has struggled with credit losses in the United States following the economic downturn, while some of RBC's Canadian rivals are in the process of expanding their U.S. retail operations.
Bank of Montreal (BMO.TO), Canada's No. 4 bank, said in December it would buy Wisconsin lender Marshall & Ilsley Corp for $4.1 billion, doubling its U.S. retail banking presence to around 700 branches. It aims to more than quintuple the annual earnings from it U.S. operations over the next three to five years.
Around the same time, Canada's second-largest lender, Toronto-Dominion Bank (TD.TO), bought Chrysler Financial for $6.3 billion. It said the deal would complement its U.S. retail banking network of more than 1,250 branches, helping to jump-start loan growth as the economy recovers.
Bank of America Merrill Lynch advised PNC, while RBC Capital Markets and JPMorgan Chase & Co advised RBC. The deal is set to close in March 2012.
Reporting by Joe Rauch in Charlotte; additional reporting by Dan Wilchins in New York, Euan Rocha in Toronto, and Aftab Ahmed in Bangalore; Editing by Gopakumar Warrier, John Wallace and Matthew Lewis