Will RBC Take Another Run at the United States?

After pulling out of the US in 2012, why does RBC’s CEO think the bank could be successful this time?

| More on:

It’s a headline that’s sure to scare Royal Bank of Canada (TSX: RY)(NYSE: RY) investors. But in an interview with Bloomberg, CEO Gordon Nixon said the bank “would certainly look at returning to the U.S.”

RBC has been there before, starting with its 2001 purchase of Centura Banks. But the United States is a very difficult market to make money in, with competition far higher than in Canada. Fixed costs (such as technological and regulatory costs) can be very steep, making it difficult for smaller institutions to compete.

RBC was faced with a choice in the United States: either back out or expand further. Mr. Nixon chose the former, selling RBC’s American retail banking operations to PNC Financial Services Group. Even though he sold at a loss, it was widely regarded as a prudent move.

So what makes this time so different?

To be clear, if RBC were to enter the United States, it would look very different than it did before. Gone would be the traditional branch-banking model. Instead, as Mr. Nixon put it, “There are going to be opportunities for new models, new technologies, new ideas and new ways of servicing customers. We’d rather be on that side of the equation than sitting there trying to defend the traditional business of a bread-and-butter bank.”

Mr. Nixon said that RBC has done a lot of homework on the US banking industry, and has even held discussions with top American internet companies.

So would it work?

There are plenty of signs that traditional branch banking will not be viable in the United States for much longer. Although these kinds of statements have been made for years, change is happening a lot faster now.
For starters, the increased use of smartphones, especially among younger people, is allowing more banking activities do be done outside of a branch than ever before. For example, new technology that allows someone to deposit a cheque using a smartphone has helped make banking more convenient than ever before.

Another factor is cost. The American Bankers Association estimates that it costs a traditional bank $250-$400 to maintain a checking account. So if a customer isn’t using his debit card enough, or doesn’t have a high enough balance, his checking account is likely unprofitable for the bank.

Newer, lower cost banking models have thus started to emerge. One that has created headlines recently is Simple Bank, which provides customers with a debit card, free access to thousands of ATMs, and a smartphone app. Simple Bank just sold itself for $117 million to Spanish bank BBVA.

If RBC were to make a similar acquisition, then the capital investment would be a lot lower than it was when it bought Centura. And such a strategy would also give it a nice leg up over the traditional U.S. banks. To borrow Mr. Nixon’s words, RBC would be the “attacker”.

So will it happen?

It’s far too early to say what RBC will end up doing, especially since Mr. Nixon himself will be retiring in early August. So the decision should fall to new CEO Dave McKay. Time will tell what that decision is.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Various Canadian dollars in gray pants pocket

For Dividend Income, I’d Buy Telus Stock Over Enbridge Today

Enbridge (TSX:ENB) and Telus (TSX:T) are dividend studs that may be worth buying if you love passive income.

Read more »

Payday ringed on a calendar
Dividend Stocks

These +4% Dividend Stocks Pay Cash Every Month

Want to earn more passive income monthly? These three stocks are great bets for substantial, growing, monthly dividends.

Read more »

Electric car being charged

This Lithium Stock Could Be a Genius Way to Invest in EVs

Here's why Lithium Americas (TSX:LAC) could be the growth stock EV investors are looking for as a way to play…

Read more »

grow dividends
Dividend Stocks

Dividend Investors: 2 Top TSX Stocks With 7% Yields

Great Canadian dividend stocks are now on sale.

Read more »

A data center engineer works on a laptop at a server farm.
Tech Stocks

TFSA Investors: 2 U.S. Tech Stocks to Buy and Hold Forever

U.S. stocks such as CrowdStrike and Datadog have the potential to outpace the broader markets and derive inflation-beating returns.

Read more »

consider the options

Better Buy in September 2023: Battery Stocks or EV Stocks?

Battery stocks and EV stocks belong to fast-growing spaces, but I’m more excited about Lithium Americas Corp. (TSX:LAC) today.

Read more »

stock data
Dividend Stocks

3 Stocks I’d Load Up on When They’re Down

These three stocks have outperformed the market greatly in the long run. They're good considerations for purchases when they are…

Read more »

Businessman holding AI cloud
Dividend Stocks

AI Stocks Are Totally Overheated: Here’s What to Buy Instead

Passive-income stocks like Suncor Energy Inc (TSX:SU) can pay you large dividends in retirement.

Read more »