Royal Bank of Canada has injected US$2.95 billion into City National Bank so far this year as part of an effort to clean up the California subsidiary’s balance sheet, according to a new regulatory filing. 

Most of that capital infusion, disclosed Tuesday in City National’s quarterly call report filed with U.S. regulators, came in conjunction with Toronto-based Royal Bank purchasing debt securities with unrealized losses from City National. City National realized a loss of $2.74 billion on available-for-sale debt securities in the three months through September, according to the filing.

Royal Bank said last month that it would take steps to bolster City National’s balance sheet — and presumably improve the bank’s margins — but didn’t disclose the amount it invested in the unit or the price it paid to purchase debt securities. Realized losses on debt securities would be “eliminated at the Royal Bank of Canada consolidated level,” the company said at the time.

The call report provided some clarity on Royal Bank’s “latest investment into CNB to prop up a struggling franchise,” Keefe, Bruyette & Woods analysts Mike Rizvanovic and Abhilash Shashidharan said in a note to clients. The necessity of Royal Bank’s “intervention is a negative read-through, highlighting CNB’s struggles to navigate through a tough operating environment.”

Many regional U.S. banks have faced capital pressures as rapidly rising interest rates have led to unrealized losses on debt securities, putting pressure on their net interest margins  — the difference between what banks make from their assets, including loans and securities, and what they pay out on liabilities such as deposits. 

In the third quarter, Royal Bank made a capital contribution to City National of almost $2 billion, which was in addition to a $950 million injection into the subsidiary in the first three months of the year, according to call reports.

The sale of debt securities by City National were part of “ongoing balance sheet management” and the bank reinvested “most of the proceeds of this intercompany transaction in new securities for our liquidity and investment portfolio, which should benefit net interest margins,” City National Chief Executive Officer Kelly Coffey said in an emailed statement Tuesday. “The capital injection we benefited from is intended to further strengthen the capital and liquidity position of our balance sheet, while also being used to pay down higher-cost borrowing.”  

Royal Bank purchased Los Angeles-based City National in 2015 for $5 billion in cash and shares to bolster its U.S. retail and wealth-management businesses. Over the past year, Royal Bank has reported $229 million in adjusted net income from City National Bank, including a loss of $12 million in the Canadian bank’s fiscal third quarter, which ran through July.

“Everything went against us this quarter” at City National, Royal Bank Chief Executive Officer Dave McKay said on an earnings conference call in August. But at an investor conference in early September, he said he expected to see City National “stabilize in Q4 and improve next year.” 

Rizvanovic and Shashidharan estimate that Royal Bank has now invested more than $10 billion in City National, including the original purchase price, and that its overall return on invested capital has averaged about seven per cent since fiscal 2017, an amount they called “relatively modest.” While rivals Bank of Montreal and Toronto-Dominion Bank have achieved more through their own U.S. banking investments, the analysts said, the return is comparable to what Canadian Imperial Bank of Commerce has reported in the U.S.