In an attempt to stabilize the financial health of City National Bank (CNB), the Royal Bank of Canada (TSX:RY) (RBC) has invested $2.95 billion in 2023, as revealed in a recent quarterly call report. This substantial investment was primarily used to acquire CNB's debt securities that were facing unrealized losses, contributing to CNB's $2.74 billion loss on available-for-sale debt securities in Q3 2023.
The Toronto-based RBC has an undisclosed plan aimed at bolstering CNB's financial health and improving net interest margins at a consolidated level. This comes amidst capital pressures and rapidly rising interest rates, which have posed significant challenges for banking institutions globally.
Analysts from Keefe, Bruyette & Woods interpret this intervention as a sign of CNB's difficulties in managing liabilities such as deposits in a challenging operating environment. The struggles faced by CNB are indicative of the larger issues plaguing the banking sector, particularly those related to managing assets and liabilities in an era of increasing interest rates.
The move by RBC to clean up CNB's balance sheet is seen as a strategic effort to restore confidence in the struggling franchise and ensure its continued operation. Despite the significant loss on available-for-sale debt securities, the investment by RBC presents an opportunity for CNB to navigate through its financial difficulties and work towards a more stable future.
Update: Investing.com was contacted by CNB with the following statement:
Kelly Coffey, CEO of City National, said:
“City National is proud to be part of RBC’s long-term strategy in the U.S., which is RBC’s second home market. The debt securities were sold as part of ongoing balance sheet management. These losses will be eliminated at the RBC consolidated level because the transaction is between affiliates. We have reinvested most of the proceeds of this intercompany transaction in new securities for our liquidity and investment portfolio, which should benefit net interest margins. The capital injection we benefitted from is intended to further strengthen the capital and liquidity position of our balance sheet, while also being used to pay down higher cost borrowing.”
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