Royal Bank of Canada RY-T is rejigging its strategy in the United States after a year of underperformance at Los Angeles-based City National Bank.
Canada’s largest lender is aiming to streamline its operations and boost cross-selling between its capital markets business, its wealth management unit and its City National subsidiary, group head of capital markets Derek Neldner said during a conference Tuesday hosted by RBC in New York.
“Those businesses were all at various phases of maturation and as a result to date, they’ve largely run in fairly distinct silos,” Mr. Neldner said. “As most of us know, there’s implicit inefficiencies when you’re running things in a more siloed way.”
Mr. Neldner, who has been tasked with overseeing the renewed strategy in the U.S., outlined four key components to the plan, including driving more referrals between its commercial, small businesses and wealth clients.
He is also looking to streamline the operations between the three businesses in the U.S. to lower costs and reduce the bank’s efficiency ratio – a key metric of productivity that measures expenses as a percentage of revenues.
The businesses use different technology platforms, which causes inefficiency and boosts costs. Mr. Neldner plans to invest in technology infrastructure to bring all the units onto the same system.
Finally, he pointed to boosting RBC’s sources of funding in the U.S. market. Banks use deposits to loan money to customers, and certain types of deposits are more expensive for lenders to hold than others.
Funding costs were thrust into the spotlight last March after a run on deposits prompted the failure of Silicon Valley Bank and other regional lenders in the U.S.
RBC is working on rebuilding the profitability of its Los Angeles lender, known as the Hollywood bank to the stars, after it failed to turn a profit and drew the ire of U.S. regulators.
Last year, the Canadian bank injected nearly US$3-billion into its U.S. division to reinforce its capital. RBC also installed a new management team with a new chief executive officer from U.S. commercial lender Fifth Third Bancorp.
In February, City National was fined by the U.S. Office of the Comptroller of the Currency for failings in many of the lender’s internal controls and risk-management processes.
RBC chief executive officer David McKay said that City National “had a great seven-year run and got into trouble last year” when funding costs rose after the U.S. regional banking crisis.
“We tripled the size of this business in the last seven years – maybe too fast – and therefore, we’ve got to stabilize the operations base and our processes before we get to the next phase of growth.”
In the fourth quarter of last year, City National booked an adjusted net loss of US$89-million. In RBC’s first-quarter results ended Jan. 31, the U.S. lender posted a loss of US$22-million. However, on an adjusted basis excluding certain items, RBC said the division earned US$88-million.
“We grew, but we grew less than an optimal level of profitability,” Mr. McKay said. “Sometimes we grew for growth’s sake. There’s a chance to reposition the balance sheet, there’s a chance to take out costs, there’s a chance to run this business a lot better.”
Stefanie Marotta