In a bid to boost its present consumer and commercial auto financing business, Royal Bank of Canada (RY) announced the acquisition of the automotive finance and deposit business of Ally Financial Inc. in Canada. RBC shelled out $3.7 billion for the transaction, including certain closing adjustments. The acquisition is the largest for RBC, surpassing the $2.16 billion purchase of Centura Banks in 2001.
Earlier, in May 2012, Detroit-based Ally put its non-U.S. business up for sale to facilitate the repayment of a government bailout worth $17.2 billion. RBC triumphed over The Toronto-Dominion Bank (TD) in securing the deal.
Ally’s Canadian unit combined with RBC’s existing division to form RBC Automotive Finance, a portion of the Personal and Commercial Banking division of RBC. It offers financial services, including floor plan financing, directly to auto dealers. Moreover, it provides finance through dealerships to customers.
RBC, which is currently ranked as Canada's largest lender in terms of assets and market capitalization, emerged as the leading Canadian automotive financing business provider with the closure of the deal. Further, it also opened up avenues for RBC to team with the Canadian unit of General Motors, a leading auto dealer, to offer subsidized loans to its clients.
Management of RBC views the acquisition of the Canadian auto financing unit of Ally as a radical growth driver as it increases the diversity of the auto financing business of RBC in Canada. Further, it will help develop healthy relationships with dealers, thus transforming RBC into a chief auto financing company in Canada. Further, opportunistic acquisitions such as this would go a long way in bolstering the bank’s loan portfolio amidst a slowdown in Canadian consumer lending.
We believe that the aforementioned acquisition by RBC will positively impact its financials in the long run. RBC currently retains a Zacks Rank #3 (Hold). Foreign banks that are performing well include UBS AG (UBS) and Credit Suisse Group (CS). Both these stocks carry a Zacks Rank #2 (Buy).
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