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RBC seeks to escape Dexia mess
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The Globe and Mail- Royal Bank of Canada (RY-T47.30----%) is in talks to buy out struggling Dexia from its partnership in RBC Dexia Investor Services, as the European bank looks to jettison assets and shore up capital.
An official with the Luxembourg government said RBC intends to use its right of first refusal to buy the remaining 50 per cent of the joint venture from Dexia’s Banque Internationale Luxembourg (BIL).
“Talks are taking place between Dexia and RBC in view of a takeover of that stake by RBC,” Luxembourg’s Finance Minister Luc Frieden told a press conference in the country’s capital city late on Monday. “These negotiations are at a very advanced stage.”
An RBC spokeswoman would not comment on the matter.
Meanwhile, the rest of Dexia’s BIL assets will be sold to a group of Qatari investors that includes members of the Qatar royal family, Mr. Frieden said.
The separate deals come as Dexia is quickly shedding assets in an effort to stabilize operations amid a European banking crisis. The Franco-Belgian bank agreed this weekend to a bailout by France, Belgium and Luxembourg that will see part of its operations nationalized in exchange for funding guarantees.
It is not clear what price the 50-per-cent stake would fetch. As the situation at Dexia grew more unstable over the past few weeks, analysts expected RBC would move to buy out the partnership, which has been in place since 2005 and is profitable.
The joint venture between Canada’s largest bank and Dexia provides institutional investors with services such as pension administration and securities lending.
The 50-per-cent stake RBC Dexia Investor Services is among Dexia’s collection of so-called ‘good’ assets that are now being sold off to raise capital.
The joint-venture business had $2.8-trillion in client assets under management at the end of last year. Analysts see Dexia’s need to sell as a buying opportunity for RBC.
“The RBC Dexia joint venture is profitable and so it's not a risk for [RBC],” CIBC World Markets analyst Robert Sedran said last week. “It's a capital light business that makes money.”
However, Dexia’s profits have declined in the past year given the economic environment. Canaccord Genuity analyst Mario Mendonca said the business has been hit by lower interest rates.
“The joint venture is not as profitable as it used to be, primarily because interest rates have declined,” Mr. Mendonca said.
The joint venture contributed $57-million to RBC’s earnings in 2010, down from $152-million the year before.
Over the weekend, Dexia secured bailout funding from Belgium, Luxembourg and France that could put pressure on European governments to extend funding to other struggling financial institutions.
The rescue plan will see Belgium nationalize Dexia’s retail banking operations in that country in exchange for €4-billion. The bank also receives up to €90-billion in state guarantees to secure borrowing over the next decade. Belgium is providing 60.5 per cent of the guarantees, France 36.5 per cent, and Luxembourg 3 per cent.
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