Canada's banking bet on the world's 1%: Don Pittis

The Bible tells us the poor will always be with us. But if you have a stake inRBC and odds are you do you'd better hope the same thing applies to the rich.

After backing out of an unsuccessful foray intoU.S.storefront banking that servedordinaryAmericans, the Royal Bank of Canada is betting insteadon the world's one per cent.

Shortly after its official year-end on Oct.31whenRBC earned arecord $10 billion, the Royal took possession of City National, Hollywood's bankerto the stars. And it's bent on expansion.

• Royal Bank has record annual profit of $10B
• Despiteheadwinds,Scotiabankand BMO report higher Q4 results

Royal isn't the only Canadian bank investing in the U.S.

TD Bank, which reported a $1.84-billion quarterly profitthis morning, now has more businesssouth of the borderthanin Canada. Wealth management is a big part of its portfolio.

But Royal's specific strategy of focusing on the rich and famous justrich will do is unique. And it expects the move to be profitable. The bank announced inJanuary that it would pay $5.4 billion US for City National, butRBC'syear-end report issued yesterday refers to the U.S. acquisition in the future tense.

That's because the deal only went through at the beginning of November after the 2015 year-end.

'Withering growth' in Canada

Some analysts seethe move into the high-net-worth sector as a hedge against a sinking Canadian resource economy. That seemed eminentlyreasonable yesterday as oil was slippingbelow $40 US a barrel.

According to the Wall Street Journal, the Royal Bankwas looking to expand south"in the face of withering growth prospects at home."In its results statements yesterdayRBC is officially far lesspessimistic about the Canadian economy than the Wall Street Journal.

With its purchase, thebank has latched onto some florid history.

When FrankSinatra'sson was kidnapped in 1963 followinga dispute over a casino, he turned to City National for the ransom money in marked bills. Frank Jr.wasreturned unharmed and the marked money helped track down the kidnappers.

Sinatra'sendorsement encouraged other Hollywood stars to come to the bank.

Dancing in the vault

More recently, in July1979, Michael Jackson held a dance party for 300 in City National's Beverly Hills vault to celebrate his gold and platinum albums.

The Royal Bank may be buying a little glamour, but itisn't planning to just sit on a safe investment. According to the Los AngelesTimes, as of 2012 City Nationalrecordeda profit every quarter for 191 years.

Instead RBC wants to expand its well-heeled customer base. City National is already established in New York, L.A. and SanFrancisco.

"The combined high-net-worth population of these three markets is over 4 times the entire high-net-worth population of Canada," RBC chief executive DaveMcKaysaid on a conference call when it announced the deal.

The bank wants to grow into other places with a lot of rich people such as Houston and London.

And whether or not they approve of the one per cent, Canadians of all walks of life will benefit ifMcKay'sstrategy turns out to be profitable.

Not only is RBC the largest asset in most Canadian stockportfolios, it is the biggest single block of shares in the Canada Pension Plan investment fund, worth over $1billion. The Quebec pension plan holds$1.3 billion worth of RBC shares.

The purchase of City National will affectRBC'soverall banking plans. As the banksaid in its earnings release yesterday, "we continued to strengthen our capital position for the acquisition of City National Corporation."

According to international banking rules,RBCneeds to keep 10 per cent of its assets in cash.

The bank's startling 2015 resultsmeanthat as of its year-end,RBC was already well on its way to increasing its core assets to cover City National's additionalmulti-billion-dollar loan portfolio.

We'll get a better idea of whether the strategy to profit from the rich is working in the Royal Bank's next set of results.

Follow DonPittison Twitter@don_pittis

More analysisby DonPittis