Tue. Jul 5th, 2022


Royal Bank of Canada’s £ 1.6bn offer for wealth manager Brewin Dolphin looks as moneyed as its clients. Canada’s largest bank offered 515p per share all-cash terms on Thursday. A whopping 61 per cent premium, priced a quarter above Brewin Dolphin’s historical high, will make it difficult for shareholders to reject.

Brewin Dolphin gives RBC a significant chunk of the fast-growing UK wealth market. By folding in RBC’s £ 5bn of existing UK wealth assets, the new group becomes the country’s third-largest with £ 64bn of assets under management.

This deal counters a recent trend of foreign buyers opportunistically snatching up UK assets cheaply. A rich premium for Brewin Dolphin sympathetically boosted the shares of closest peers Rathbones and Quilter, the former up 12 per cent.

Lex charts: Wealth manager valuations and fees, Annual revenues / assets under management (%) versus Market value / assets under management (%) Brewin Dolphin outperformed before bid, Total returns (rebased) Brewin Dolphin fees, Revenues as% of assets under management

RBC’s choice of the UK for expansion has to do with Brewin Dolphin’s recent business performance. Net inflows of £ 1bn in the final three months of 2021 were the group’s best ever. Net inflows have averaged 3.5 per cent of AUM over the past three years, about double the growth at Rathbones.

RBC clearly likes what it sees, paying the equivalent of 2.8 per cent of AUM or 22 times next year’s earnings. Based on the AUMs of Rathbones and Quilter, similar ratios would suggest values ​​70 per cent and 50 per cent higher, respectively, from their current share prices.

Consolidation reflects the pressure on fees felt across the wider asset management sector. Brewin Dolphin’s revenues as a share of AUM have declined by 32 basis points over the past decade to 0.78 per cent in the latest financial year. The backing of a larger parent bank could provide a sturdier backstop for the combined wealth managers.

RBC could achieve cost savings of between 20 and 30 per cent of overheads based on previous deals in the sector. Brewin Dolphin had already begun cost-cutting efforts to stem margin erosion. Pre-tax margins of 22.4 per cent last year have shed 2 percentage points in the past two years.

RBC will need more than cost-cutting to get the most out of its purchase. It will need to maintain performance and retain staff. Brewin Dolphin shareholders should be happy with their own newfound wealth.

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