City National Bank recorded a $247 million loss during a tumultuous fourth quarter that led to
As interest rates have risen this year, the Los Angeles-based bank
Last month
Those transactions resulted in realized losses at City National, which were eliminated at the holding company level. But the transactions also bolstered the U.S. bank's capital and liquidity position, and they are said to put City National in a better position to return to profitability.
"We still face overall challenges from funding costs, as you can imagine," RBC Chief Executive Dave McKay said Thursday on a call with analysts. "But that will start to alleviate as you see rates start to come down in the U.S., maybe sooner than most people thought they would."
Even more than many other U.S. regional banks, City National has been hit hard by the rapid rise in interest rates that started in 2022.
The bank's deposit costs rose more quickly than company executives anticipated. And on a percentage basis, City National had the fourth-highest average unrealized securities losses among U.S. banks with at least $50 billion of assets, according to a six-quarter data analysis from KBRA Financial Intelligence.
After City National reported a $38 million quarterly loss this summer, RBC announced that
The $247 million loss that City National reported from Aug. 1 through Oct. 31 was equal to 54% of the U.S. bank's net income last year — and 74% of its profits in 2021.
Amid the profitability challenges, City National has laid off more than 5% of its workforce. McKay said that the bank's new management team has a clear focus on improving productivity. "We still have a very high expense ratio for a business of this size, compared to peers," he said.
At the same time, RBC continues to make investments in what it calls the operational infrastructure of City National.
RBC executives also said that they're focused on improving the coordination among the company's three U.S. platforms — wealth management, capital markets and City National Bank. Derek Neldner, the company's group head of capital markets, recently got a larger mandate that includes responsibility for the integrated strategy and performance of RBC's U.S. businesses.
During the most recent quarter, one bright spot for City National was its net interest margin, which rose by 29 basis points on a linked-quarter basis to 2.78%. The company attributed the improvement partly to benefits from the intracompany sale of City National debt securities, as well as to lower levels of funding from the Federal Home Loan banks.
McKay described the expected return to profitability at City National in its fiscal first quarter — which ends on Jan. 31 — as a "stepping stone" toward more normal levels of net income in 2025.
When an analyst asked him whether, in retrospect, he would have done anything differently at City National, McKay said that the bank should have focused more on deepening relationships with multiproduct clients. His comments suggested that City National's deposit costs rose as quickly as they did this year because many clients did not have enough products tying them to the bank.
City National focuses more on wealth management,
"Deposits came in so quickly and so easily to this franchise over the last five, six years," McKay explained. "We focused on a lot of single-service lending. And I think if we had really focused on leveraging into multiproduct relationships, we'd see a different profitability model now."
Still, McKay largely attributed the bank's recent difficulties to macroeconomic factors that were outside of RBC's control.
"This franchise has operated in this client segment for 60 years, and we have not seen this type of volatility in the overall business," he said. "It came at us really quickly in March. And I think we've done a good job pivoting, and have a number of levers to do that."
