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RBC Gets Regulatory Nod

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Last week, Royal Bank of Canada (RY - Free Report) – also known as RBC – got permission from Canada’s Competition Bureau for the acquisition of the Canadian automotive finance and deposit business of Ally Financial Inc. RBC shelled out $3.7 billion for the transaction, including certain closing adjustments. This is the largest acquisition for RBC, surpassing its $2.16 billion purchase of Centura Banks in 2001.

The Competition Bureau stated that the deal is unlikely to impair competition in the Canadian market as RBC’s share, subsequent to the deal, would continue to be modest. However, the anti-trust regulator announced that the deal is subject to approvals from the finance ministry as well as the bank regulators. RBC triumphed over The Toronto-Dominion Bank (TD - Free Report) in securing the deal.

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.

Ally’s Canadian unit joined 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, will emerge as the leading Canadian automotive financing business provider with the closure of the deal. Further, it opened up avenues for RBC to team up with the Canadian unit of auto-dealer giant General Motors to offer subsidized loans to its clients.

Management at RBC views the abovementioned acquisition as a radical growth driver as it increases the diversity of the auto financing business of the company in Canada. Further, it will help develop healthy relationships with dealers, thus transforming RBC into a chief auto financing company in the country. Further, opportunistic acquisitions such as this would go a long way in bolstering the bank’s loan portfolio amid a slowdown in Canadian consumer lending.

We believe that the 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 - Free Report) and Credit Suisse Group (CS - Free Report) . Both these stocks carry a Zacks Rank #2 (Buy).

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