Royal Bank of Canada, the nation's largest lender, agreed to buy Ally Financial's Canadian auto-finance and deposit business in a cash deal providing $4.1 billion in proceeds to Ally.

Royal Bank will buy the Ally business for a C$1.4 billion ($1.4 billion) investment net of excess capital, the Toronto- based lender said today in a statement. RBC said the total price will be C$3.1 billion to C$3.8 billion, depending on the size of a dividend taken out by Ally prior to closing. The deal is the largest takeover ever for Royal Bank, eclipsing a $2.16 billion purchase of Centura Banks in 2001.

"Auto loans came through the crisis as a very, very good asset," Peter Routledge, an analyst with National Bank Financial, said in a telephone interview. "It was profitable, credit quality was better than people expected, yields were decent so it's good risk-return. It just seems to me like a good asset for Royal Bank."

Chief Executive Officer Gordon Nixon, 55, has said Royal Bank would explore "strategic acquisitions" amid a slowdown in Canadian consumer lending. The company posted a record C$1.13 billion profit at its domestic-banking unit in the third quarter, fueled by increasing deposits, mortgages and loans.

Ally is getting $620 million above liquidation value, the Detroit-based company said in a statement. Ally put its non-U.S. operations up for sale in May to help repay a $17.2 billion government bailout that left the U.S. with a 74 percent stake.

Royal Bank fell 3.2% to C$56.70 at 9:41 a.m. in Toronto. The shares have gained 9.1% this year.

Royal Bank expects the Ally Canada business to generate C$120 million in net income on a standalone basis in the first 12 months after closing, the lender said. The takeover is expected to "modestly" add to per-share earnings in its first year, the bank said.

"The combination of Ally and RBC presents a great opportunity for profit growth and business growth in Canadian banking," Dave McKay, RBC's group head of personal and commercial banking, said today in a conference call.

RBC is buying a business that offers inventory financing to more than 580 auto dealerships across Canada, the lender said. RBC said it will have C$24 billion in auto loans receivables and offer financing to more than 890 dealerships after this transaction, expected to close in the first quarter of 2013.

Royal Bank also said it agreed with General Motors Co.'s Canadian unit to become a provider for low-rate consumer auto loans subsidized by the manufacturer.

Royal Bank and competitor Toronto-Dominion Bank had shown interest in Ally's Canadian operations, a person with knowledge of the matter said last month.

RBC's Ally announcement came 20 minutes before Toronto- Dominion said in a statement it agreed to buy the $5.9 billion U.S. credit-card portfolio of Minneapolis-based Target Corp.

Bank of Nova Scotia offered in August to buy the Canadian banking operations of ING Groep NV for C$3.1 billion.

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