In what looks like the first step by The Royal Bank of Scotland Group ( RBS ) towards trimming its retail banking operations in the U.S., the diversified British bank announced its decision to sell Chicago-area Charter One branches, small business operations and some middle market relationships to U.S. Bancorp ( USB ) earlier this week. The move is hardly a surprise, as these operations are a part of the RBS Citizens Financial Group (RBSCFG) - RBS's American retail banking subsidiary - and the bank has been under considerable pressure from the U.K. government over recent years, to get rid of its overseas business and focus entirely on its U.K. retail & commercial banking businesses. Bank of America-Merrill Lynch ( BAC ) served as financial adviser to the deal.
We had highlighted the possibility of RBS selling or divesting its Citizens operations two years ago in our article ICB Directives to Stunt RBS' Growth, Could Lead to Citizens Sale , and the bank itself detailed plans to float the business last February (see RBS Earnings: More Investment Banking Cuts And Citizens Spin-Off). More recently, Canada-based Toronto-Dominion ( TD ) Bank expressed its interest in the Citizens business - bidding £8 billion ($12.8 billion) for it (see TD Bank's £8 Billion Bid For Citizens Bank Good News For RBS). Interestingly, the Charter One branches are not of much value to TD Bank as both banks have a similar branch network in the Illinois, Michigan and Ohio region. This branch sale by RBS could suggest that the bank is considering a sale of the Citizens business to TD Bank.
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RBS has a network of 1,400 branches across 12 states in the U.S. operating under the Citizens and Charter One brand name. The deal inked with U.S. Bancorp includes 94 retail banking branches in the Chicago area. The bank revealed that the retail banking business in the region is not very profitable, and that it would rather focus its efforts in more profitable areas where it has a strong presence. Notably, RBS will continue to run its commercial banking as well as mortgage, auto and student lending operations in the region.
As a part of the deal, RBS will hand over the branches with $5.3 billion in deposits and $1.1 billion in loans for a deposit premium of $315 million (roughly 6% of the deposit base). The roughly 800 employees are expected to be retained by U.S. Bancorp. While the deal helps RBS scale back its operations, it helps U.S. Bancorp consolidate its market share in the area by roughly doubling its deposit base.
The changes to the balance sheet of both banks from this deal are expected to be complete by mid-2014, after the deal gets the requisite regulatory green light. You can see the changes by tweaking the chart below which captures the size of U.S. Bancorp's deposits for a year, and the transaction has negligible impact on the bank's share price.
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