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From California to Canada: RBC looks to move jobs north

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Following two quarters of big losses at City National Bank, Royal Bank of Canada is taking steps to make the Los Angeles-based subsidiary more efficient.

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Three months after former Fifth Third Bancorp CEO Greg Carmichael joined City National Bank, the strategy for returning the Los Angeles-based bank to profitability is starting to come into focus.

City National, a unit of Toronto-based Royal Bank of Canada, is looking to cut costs substantially after reporting losses of $285 million between May and October 2023.

“We’re starting to get a much better handle on the cost structure,” RBC Chief Executive Officer Dave McKay told analysts on Tuesday, referring to expenses at City National. “And there remains a very significant opportunity for us to start to bring that cost structure in line with the size of the organization.”

City National’s efficiency ratio is in the high 70s, while other comparably sized banks generally report ratios in the low 60s, McKay said. Executives typically prefer their bank’s efficiency ratio, which measures expenses as a percentage of revenues, to be on the lower side.

RBC has already reduced the size of City National’s workforce by 5%. And McKay pointed to another possible way for the Canadian bank to reduce costs in its U.S. operations — by moving jobs from California to British Columbia — though he didn’t say whether he was talking specifically about City National positions.

“We’re looking at consolidating work from the U.S. into Canada to save on cost, particularly from California, where it’s very expensive to hire bank employees. They’re harder and harder to find, given all the consolidation in the California market,” McKay said at the RBC Capital Markets Canadian Bank CEO Conference.

Those comments came in response to a question about RBC’s pending acquisition of HSBC Canada, which got regulatory approval in December. In announcing the regulators’ approval, RBC committed to building a global banking hub in Vancouver, which would be home to more than 1,000 jobs.

McKay noted Tuesday that British Columbia is in the same time zone as California, and he said that the Vancouver banking hub was a strategic part of RBC’s plan when it agreed to buy HSBC Canada.

City National, which was operated independently before RBC acquired it in 2015, ran into trouble last year as a result of rising deposit costs, higher expenses, larger provisions for credit losses and unrealized securities losses.

Carmichael, who retired as Fifth Third’s CEO in 2022, became executive chair of City National’s board of directors last October. The following month, Howard Hammond, another former executive at Cincinnati-based Fifth Third, took over as City National’s CEO.

Since RBC bought City National, it has run the U.S.-based bank at arm’s length from the rest of the Canadian company, said Ebrahim Poonawala, an analyst at Bank of America Securities. He now expects City National to be brought into the RBC fold to a greater extent.

“I think that’s kind of the mandate that Greg has,” Poonawala said.

Historically, City National has had a large focus on the entertainment industry. When Hammond joined the bank, former CEO Kelly Coffey moved into a newly created role as CEO of its entertainment unit. City National also announced on Tuesday that Martha Henderson, its vice chairman of entertainment banking, will retire on Feb. 2.

Poonawala predicted that City National will focus less on the entertainment sector over time, though he does expect the bank to maintain that niche.

“I do think we’ll see them broadening out,” Poonawala said. “If you want to look at new drivers of growth, you’re kind of boxed out if you’re just focused on your niche.”

McKay said that the cost of running a U.S. bank continues to rise, pointing in particular to higher regulatory expectations. But he predicted that City National’s financial performance will be better in 2024 than it was in 2023, and then better again in 2025. 

“And we’ll be back on track,” McKay said. “So it’s a six-month blip.”

Despite the recent losses at City National, RBC is continuing to focus on the U.S. market as it considers the possibility of another acquisition.

McKay said that the Canadian company will evaluate opportunities in the U.S. wealth management and commercial banking sectors, though he cautioned that market uncertainty and a shortage of targets are impediments to any deal in the near future.

“And therefore it isn’t in our short-term objectives in any way,” McKay said.

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