RBC Bank

RBC acquisition confirmed

Sagicor Group confirmed the acquisition of RBC Royal Bank Jamaica’s operations for a price of $9.5 billion. Most of RBC operations would be absorbed into Sagicor Bank but the banking entity will be a direct subsidiary of the group.

The book value was of the order of $10.5 billion but as the operation has been bleeding at around $500 million per quarter the book value would be just under $10 billion at the time the agreement was signed. Loans on the book of around $32 billion reflect good loans as the bad ones were already provided for.

Pooling Sagicor Investments with that of RBC on the surface would create a combined banking group with assets of nearly $150 billion with loans of $40 billion and revenues around $12 billion. However, that is unlikely as the bank will be a totally separate entity going forward. Sagicor Group confirmed that there will be cuts and branch closures where branches overlap. This will results in significant cost savings.

This will not be the first time that Sagicor Bank would have entered in merger arrangements having absorbed Manufacturers Merchant bank and Trafalgar Development Bank some years ago.

For the twelve months to September last year, the RBC lost $1.7 billion and $456 million between July and September according to central bank’s data. For the year ending October 2012, RBC reported a loss of $2 billion before tax which was down from $3 billion in 2011. In 2012, loan losses contributed $650 million to the loss and income was inadequate to cover housekeeping expenses. Most likely the NDX in 2013 that cut interest rates would have negatively affected them, thus reducing the net interest margin.

The bank’s problem apart from heavy loan losses is the fixed operating cost that the income generated cannot match. It would require major loan growth to deliver the required income and that has not been growing fast enough having reached $32 billion in 2013 from $30.5 billion in October 2012.

Trading picks up | In Wednesday’s trading on the Jamaica Stock Exchange, Sagicor Group and Sagicor Investments climbed ahead of the news of the RBC takeover. The order book for Sagicor Group shows only six offers; two are at $10.50 to sell 25,400 units, one for 3,000 units at $10.95 and three at $11 for 255,000.

On the buy side there are bids as high as $10.50 for 25,000 units then $9.80 with only 1,185 units and 128,265 units on the bid between $9.75 and $9.79 and of course, there are bids below these levels.

Sagicor Investments had 7 bids and 7 offers with the highest bids being $18 for 1,000 units; 14,926 units for $16.50 and 100,000 at $15. On the sell side, there are only 1,565 units at $19; 7,235 shares at $21.50; 30,000 units at $22; 20,000 at $26.71 and 1.34 million units at $30.

Related post | A bigger Sagicor Bank?

A bigger Sagicor Bank?

Reports are circulating that Sagicor Group is in talks to acquire the RBC Royal Bank Jamaica’s operations. IC Insider understands that an official announcement could be made to the Jamaica Stock Exchange by the end of Wednesday.

From all indications, RBC operations would be absorbed into Sagicor Bank. IC Insider gathers that the deal has not yet been inked, but talks are in fact taking place that will most likely to lead to a deal.

As is the case with the acquisition of this nature, the deal would be subject regulatory approval and due diligence. No purchase price has been revealed but Sagicor will most likely acquire it for a figure that will be lower than book value that is currently around $10.5 billion as the bank’s Jamaica operations has been bleeding for some time at close to $2 billion per year based on 2013 numbers.

How much will Sagicor spend? | For the twelve months to September last year, the RBC lost $1.7 billion and $456 million between July and September according to BOJ’s data. The continued losses suggest a price around $5 billion. For the year ending October 2012, RBC reported a loss of $2 billion before tax, which was down from $3 billion in 2011. In 2012, loan losses contributed $650 million to the loss and income was inadequate to cover housekeeping expenses. Most likely the NDX in 2013, that cut interest rates, would have negatively affected the bank thus reducing the net interest margin. The bank’s biggest problem, apart from heavy loan losses, is the fixed operating cost that the income generated cannot match. It would require major loan growth to deliver the required income and that has not been growing fast enough having reached $32 billion in 2013 from $30.5 billion in October 2012.

If the deal goes through, it would create a combined banking group with assets of nearly $150 billion, loans of $40 billion and revenues around $12 billion.

Sagicor would enjoy significant cost savings from a merger of both entities as some of the branches overlap and should lead to closure of some and expansion of others. Head office operations would result in major cost savings as well, once the two are fully integrated. This would not be the first time that Sagicor Bank have entered in merger arrangements having absorbed Manufacturers Merchant Bank and Trafalgar Development Bank some years ago.

Sagicor Jamaica is a IC Insider Buy Rated Stock. To view the full list, click here.