City National Bank sticks with cross-selling, despite controversy over the strategy

When Toronto’s Royal Bank of Canada bought L.A.’s City National Bank, it was a deal built on the idea of cross-selling — offering more services to existing customers.

That’s a common strategy across the banking industry, but one that’s been tarnished by the scandal over unauthorized accounts at Wells Fargo & Co., with members of Congress and others pinning much of the blame on the San Francisco bank’s emphasis on cross-selling.

But the executives behind the City National-RBC deal aren’t backing away from the strategy — if anything, they’re doubling down — and they say it has shown results in the year since the deal closed, sparking growth at a Los Angeles institution often known as the Bank of the Stars for its close association with celebrities and the film industry.

“Cross-sell is synonymous with meeting customer needs,� RBC Chief Executive David McKay told The Times. “If you do it properly, you’re meeting a customer need and adding value to that customer. Every business is built on that.�

City National Bank, which operates as a separate unit of RBC, had assets of about $36 billion when the deal closed last November. City National Chief Executive Russell Goldsmith, who stayed on after the acquisition, expects that it will end the year with about $44 billion, growth of more than 20%.

The bank even hired about 350 workers — there were no layoffs — and plans to hire at least that many more over the coming year.

Analysts also aren’t envisioning problems given that the cross-selling is geared toward wealthy clients, businesses and business owners, not the kind of average Joes and Janes targeted by Wells Fargo. What’s more, they note that the root of problems at Wells Fargo seems to have been poorly structured incentives and a lack of oversight.

“Cross-selling is a dirty word, but that’s the reality. Every bank does it, probably every retail company,� said Brian Klock, an analyst at brokerage and investment bank Keefe Bruyette & Woods. “I don’t think cross-selling itself is the problem.�

When RBC announced plans to buy City National in January 2015, the opportunities for both banks were clear.

RBC had more than 300,000 clients in its U.S. wealth-management practice, but, unlike big players such as Bank of America and JPMorgan Chase, had no bank to offer those clients checking accounts, mortgages or business banking services.

City National had a long list of business clients — including as a top provider of financial services to Hollywood and the broader entertainment industry — but was too small to offer some of the big-bank services those clients might need, such as investment banking.

McKay said the deal has allowed RBC’s capital-markets practice to work with companies it had no relationship with before acquiring City National. And with RBC’s backing, City National has been able to make larger loans, allowing it to continue working with companies that might otherwise turn to a larger bank.

In September, for instance, City National led a syndicate of 12 banks to lend $500 million to Ole, a Canadian music-rights-management company. Ole had been a City National client for years, but the bank would not have been able to lead a deal of that size before it had RBC’s backing, Goldsmith said.

The banks have been slower in pitching City National’s banking services to RBC’s wealth management clients. And that’s by design, said Goldsmith, who also has run RBC’s U.S. wealth-management unit since the deal closed.

“These are important client relationships. Nobody wants to get it wrong,� Goldsmith said. “These things sound simple, but that’s deceptive. You have to really dig into them. And we’ve done that.�

For much of the last year, the bank ran a pilot program in San Diego and Beverly Hills, figuring how to go about selling City National’s banking services to RBC clients. Cross-selling the wrong way could alienate clients or, worse, run afoul of the law.

“We have some very specific laws in this country against selling a mortgage unless you’re a licensed mortgage representative,� Goldsmith said. “We went to financial advisors and said, ‘You want to be able to offer your clients mortgages, but legally you cannot talk to them about mortgages unless you’re licensed to do that.’�

With the pilot program over and some “rules of the road� set, Goldsmith said the bank is ready to roll out its services to RBC wealth-management clients elsewhere — first in New York and the rest of Southern California, then in City National’s other markets by the end of next year.

Sohrab Movahedi, a banking analyst at BMO Capital Markets, said he believes that the strategy makes sense for the bank and that it is unlikely to run into the kind of problems seen at Wells Fargo.

“If this were a mass-market deal, I might feel different,� he said. “City National is not trafficking in small mortgages or small credit cards. It’s catering to high-net-worth, sophisticated clients.�

The L.A. bank is also planning to open offices next year in Minneapolis and Washington, D.C., markets where RBC Wealth Management has offices but City National does not. The bank recently opened a third location in New York — in the same Lower Manhattan complex that’s home to RBC’s U.S. capital markets practice.

Over the next few years, City National also plans to beef up its consumer mortgage business.

The bank has long offered home loans, but, unlike most banks, it won’t offer them to just anyone. The bank is what’s known as an accommodation lender, meaning that it only offers mortgages and home-equity loans to existing bank clients.

But that will change sometime in the next year or two, and City National will start offering mortgages with the goal of bringing in new customers for the rest of the bank’s services, McKay said.

That’s a strategy San Francisco’s First Republic Bank has employed for decades, luring wealthy customers with good deals on jumbo mortgages — those that are larger than the $417,000 cap for loans bought by Fannie Mae and Freddie Mac — and then pitching other services.

“Traditionally, City National brought in clients by attracting a commercial lending account,� McKay said. “We’re starting to think about how we use mortgages and jumbo mortgages to attract customers in the same way First Republic might use them. Then the challenge is to anchor them with other services.�

There’s potential for more business there, but analysts note that this is new territory for City National.

“At City National, the consumer product has been the secondary part of the relationship,� said Klock, the Keefe Bruyette and Woods analyst. “It’s an unknown. [Mortgages have] never been part of their core philosophy. It will be interesting to see if it works.�

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