Royal Bank of Canada may raise up to C$15 billion ($14 billion) through the sale of debt securities or preferred shares, an option that could set the stage for a major acquisition by Canada's largest lender.
The quiet move by Royal -- which filed a prospectus outlining the possible sale last Friday, without an accompanying news release -- is seen as a prudent move by the bank to ready itself for buying opportunities that are bound to crop up in the months ahead.
Management, at this point, doesn't have the intention of drawing down its bolstered capital base for the sake of a deal, so raising some additional money gives them the flexibility to go out and acquire new assets while at the same time maintaining the financial base that they've built up, said Edward Jones analyst Craig Fehr.
I wouldn't necessarily take this to mean that a deal is extremely imminent ... (but) we can probably interpret this as a favorable signal that they are willing to do something if an opportunity arises, Fehr said.
Like all of Canada's big banks, Royal is very well capitalized by international standards. At the close of the third quarter, ended July 31, Royal had a Tier 1 capital ratio of 12.9 percent -- a level some analysts have said is too high, because the money is not being used to boost earnings.
Canadian banks have emerged from the financial crisis at the top of the global banking heap, having remained relatively profitable throughout the downturn, despite accepting no government bailout money, and are seen as likely buyers as the industry limps out of the economic slump.
Royal's chief executive, Gord Nixon, said in late August he expected to see plenty of consolidation in the industry in the next two to five years -- and assured analysts that his bank was actively looking for opportunities to expand.
Our strong financial position gives us the flexibility to invest in our businesses and to grow our asset base at a time when banks around the world will be shrinking theirs, Nixon said on a conference call after the earnings were released.
According to the prospectus, Royal may raise C$15 billion through senior debt securities, subordinated debt securities, or first preferred shares through October 2011.
Last month, the bank posted quarterly earnings that topped expectations, helped by a big jump trading revenue that more than offset higher loan-loss provisions.
Nixon has repeatedly said the bank -- which has a strong retail banking presence in Canada, struggling retail operations in the U.S. Southeast, and strong global capital markets and wealth management -- is looking to build on its existing strengths rather than branch out into new geographies or business segments.
The U.S. banking segment needs improvement, Fehr said of Royal's possible acquisition strategy. It needs to build both efficiencies and scale. On the global wealth management platform, they already have a top tier franchise, and building on that is an area where they could exploit good returns in the business.
($1=$1.08 Canadian) (Additional reporting by Euan Rocha; editing by Rob Wilson)