Royal Bank of Canada (RBC) has injected capital into its subsidiary City National in an effort to improve its liquidity and alleviate the burden of higher borrowing costs. RBC purchased City National in 2015 for $5.4 billion and is now taking steps to enhance the subsidiary’s profitability. The specifics of the capital injection were not disclosed by RBC. However, KBW analyst Mike Rizvanovic warned that City National’s outlook may remain challenging due to the possibility of sustained high interest rates.
In addition to the capital injection, City National has sold certain debt securities, resulting in realized losses for the unit. However, RBC reassured investors that these losses will be eliminated at the consolidated level of the bank. City National will reinvest most of the proceeds from the sales into new securities for its liquidity and investment portfolio, which is expected to benefit net interest margins. This repositioning of securities could be a positive move if the bank has sufficient capital to absorb the losses, according to Morningstar analyst Eric Compton.
City National’s assets were valued at $95 billion as of June. The regional banking sector has faced challenges this year, particularly following the collapse of Silicon Valley Bank in California. The Federal Reserve’s tightening measures since March 2022 have put pressure on banks’ longer-term securities, leading to concerns about the financial health of lenders. City National recorded losses of $38 million in the May-July quarter, compared to a profit of $102 million the previous year. RBC CEO Dave McKay attributed these losses to a combination of adverse factors including a credit loss on a real estate item, higher costs, and rising deposit betas.