The transaction comes after a bidding war that some reports said included fellow Canadian TD Bank (TSX:TD), among others.
RBC said its net cost for the deal will be about $1.4 billion, when excluding excess capital to be acquired in the deal. Including excess capital, RBC will pay between $3.1 billion and $3.8 billion.
"Given the quality of the Ally business and the attractiveness of the industry — I think Ally reported that there were up to 15 bidders that started this process — I would characterize the interest in the Ally business as high and the competition was strong," said RBC's personal and commercial banking president Dave McKay in a phone interview.
"The reason we're comfortable in the price paid is if you look at the earnings profile and the multiple we paid on earnings ... it's accretive in year one. All of those point to good value for the business that we paid."
Ally Financial's Canadian unit provides financing to nearly 600 auto dealerships across the country. The finance company's consumer business has about 450,000 loans outstanding.
The assets are part of those of the former General Motors financing arm.
Royal Bank said that once the deal closes it will handle private auto loans in Canada that are subsidized by General Motors.
"We entered this deal with an agreement already made with GM, so we know where we stand and we factored that into the price of the deal," McKay said.
Starting early next year, GM Financial will begin offering wholesale financing to GM dealers in Canada. The competitors are expected to be RBC, as well as TD Bank (TSX:TD) and Scotiabank (TSX:BNS).
General Motors Co. is among the 30 bidders for Ally's international operations, but lost out in Mexico and Canada. In a regulatory filing in August, GM said its financing arm, GM Financial, submitted a bid for Ally's operations in Canada, Mexico, Europe and Latin America, though it didn't say how much it offered.
"We believe this acquisition makes strategic sense for Royal as it is an opportunity to marry its deposits with higher yielding assets," said Desjardins analyst Michael Goldberg in a note.
"We expect that ResMor, the much smaller trust company (owned by Ally), will eventually be put up for sale by Royal. We view Home Capital Group and Canadian Western Bank as possible suitors."
The deal with Royal Bank, expected to close early next year, is part of Ally's plan to accelerate repayment of the US$17.2 billion bailout, but it was unclear exactly when the government would get more money. So far Ally has repaid $5.8 billion. The U.S. Treasury owns 74 per cent of Ally common stock plus $5.9 billion of preferred stock.
"This transaction represents another significant step toward our plans to pursue strategic alternatives for our international operations and accelerate plans to repay the remaining U.S. Treasury investment," Ally chief executive officer Michael Carpenter said in a statement.
Earlier this week Detroit-based Ally Financial reached an agreement to sell its Mexican insurance business, ABA Seguros, to Swiss insurance company ACE Group for $865 million.
"We continue to evaluate options for our remaining international operations in Europe and Latin America, and we are encouraged by the progress and interest in the businesses," Carpenter added.
— with files from The Associated Press