Royal Bank of Canada has entered a $4.1 billion deal to purchase the Canadian auto finance and deposit arm of Ally Financial Inc. Royal Bank of Canada hopes to make its vehicle-lending business grow during a time when loan growth overall in the country is slowing down. Last Tuesday, Canada's largest bank said that the deal would significantly boost its current domestic consumer and commercial auto financing business.
With this deal, the bank would be considered a leader in the segment too. Ally, which is majority-owned by the U.S. Treasury, announced plans last May to sell its international operations, hoping to hasten the repayment of government bailouts in the financial crisis. The company is the former auto lending arm of General Motors.
It made a deal last week to sell its Mexican insurance business to ACE Ltd for $865 million. Ally anticipates that it will be able to get total proceeds of around $4.1 billion from the sale of its Canadian business. RBC said its cash outlay on the deal would be between $3.1 billion and $3.8 billion, since it is dependent on how big this dividend is that Ally wants to extract from its Canadian business before closing.
Canadian banks continue to generate steady profits but they have found it difficult lately to hasten growth in the face of sluggish loan growth and narrow interest margins. With this environment, analysts think that the agreement would be beneficial to RBC since its personal auto lending is one of the areas that continue to record relatively strong growth.
In a note to clients, Barclays analyst John Aiken said that the transaction is being viewed positively since it increases scale and builds out Royal's highly profitable franchise at home. It’s believed that this deal, which needs regulatory approval, will close in the first quarter of 2013. A source told Reuters last Monday that RBC competed with another Canadian bank, Toronto-Dominion Bank, in an auction for the assets.