Fitch Ratings has placed City National Corporation's (CYN) long-term Issuer Default Rating (IDR) of 'A-'on Rating Watch Positive. The action follows the announcement that Royal Bank of Canada (RY 'AA'/Stable Outlook) has announced an agreement to acquire CYN for approximately $5.4 billion.
A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT
Fitch recently affirmed the Issuer Default Rating (IDR) of the RY 'AA' (please see separate Fitch press release dated Jan. 23, 2015 for detailed rationale). Fitch believes the acquisition of CYN by RY would improve the CYN's overall financial profile as it would stand to benefit from RY's Wealth Management platform in the U.S., which would help diversify CYN's revenue base. RY has a strong franchise that includes personal and commercial banking, wealth and asset management operations, insurance, investor and treasury services and capital markets activities primarily in North America. As part of the review, Fitch will consider whether CYN's rating are equalized or notched from RY.
Fitch expects to resolve the Rating Watch upon the completion of the transaction with RY. Closing is expected before the end of calendar 2015 subject to customary closing conditions, including receipt of required regulatory approvals and the approval of City National's stockholders.
The Rating Watch Positive is reflects Fitch's view that RY's acquisition will strengthen the company profile CYN.
RATING SENSITIVITIES - IDRS, VRs, SENIOR AND SUBORDINATED DEBT CYN's ratings will likely be upgraded upon RY's completion of the acquisition, although the degree of rating uplift is yet to be determined. Under Fitch's criteria, CYN's ratings may be equalized or notched down from RY's based on a number of factors. Should RY be unable or unwilling to complete the acquisition of CYN, Fitch would evaluate the reason and assess CYN's ratings accordingly.
KEY RATING DRIVERS - HOLDING COMPANY
CYN's IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities.
RATING SENSITIVITIES - HOLDING COMPANY
Should CYN's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. This is viewed as unlikely though for CYN given the strength of the holding company liquidity profile.
Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. Given Fitch's views that CYN may not receive a long-term debt requirement, its ratings may not be impacted as a result of Fitch's evolving review regarding notching.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
CYN has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CYN is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not currently incorporate any support.
RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
CYN's support rating of '5' could move higher upon RY's completion of the acquisition of CYN, which would reflect potential institutional support from RY. However, CYN's Support Rating Floor is not anticipated to change regardless of the outcome of acquisition by RY, since there is no rating floor for institutional support.
KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS
CYN's uninsured deposit ratings are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS
CYN's ratings will likely move higher upon RY's completion of the acquisition of CYN. Should RY be unable to complete the acquisition, CYN's ratings will likely remain unchanged.
Fitch has placed the following ratings on Rating Watch Positive:
City National Corporation
--Long-term IDR 'A-';
--Short-Term IDR 'F1';
--Viability Rating 'a-';
--Senior Unsecured 'A-'
--Preferred Stock 'BB'
--Support '5'.
City National Bank
--Long-term IDR 'A-';
--Long-term Deposit 'A';
--Short-Term IDR 'F1';
--Short-Term Deposits 'F1';
--Viability Rating 'a-';
--Subordinated debt 'BBB+';
--Support '5'.
Fitch has affirmed the following ratings:
City National Corporation
--Support Floor at 'NF'.
City National Bank
--Support Floor at 'NF'.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Fitch Affirms Royal Bank of Canada's Ratings at 'AA/F1+': Outlook Remains Stable (Jan. 23, 2015)
--'City National Corporation' (Oct. 21, 2013);
--'2015 Outlook: U.S. Banks' (Nov. 12, 2014);
--'U.S. Basel III and Dodd Frank Act Regulatory Guide' (Nov. 21, 2014);
--'U.S. Banks: The Risks with Energy Slide' (Jan. 16, 2014);
--'U.S. Banks: Liquidity and Deposit Funding' (Aug. 08, 2013);
--'U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)' (June 18, 2013);
--'U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?' (July 11, 2013);
--'Fitch Fundamentals Index - U.S. (4Q14)' (Jan. 15, 2014);
--'Risk Radar Global - Q314' (Sept. 15, 2014);
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Jan. 31, 2014);
--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (Mar. 27, 2014).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978621
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