(Bloomberg) -- Bank of Nova Scotia agreed to buy a minority stake in KeyCorp, which was among the U.S. regional banks hit hardest in last year’s tumult, for about US$2.8 billion as part of a focus on North America.
Scotiabank will acquire 14.9 per cent of Cleveland-based KeyCorp by buying shares at $17.17 each, representing an 11 per cent premium to their volume-weighted average price over the past 20 trading days, it said in a statement Monday.
Toronto-based Scotiabank is the Canadian bank with the biggest international footprint, but most of its investments abroad have been in Latin America, where returns have been underwhelming. The lender announced a plan last year to reevaluate some of those stakes and focus new capital spending on North America and the Caribbean.
KeyCorp has about 1,000 U.S. branches offering commercial and retail banking and investment advice and services, and oversees about $187 billion in assets. Scotiabank highlighted KeyCorp’s focus on commercial clients in the statement, calling that a good fit for the Canadian bank, which has a “well-established” U.S. capital-markets franchise.
The investment “significantly increases the capital deployed to our identified priority markets,” Scotiabank Chief Executive Officer Scott Thomson said in the statement, adding that “we look forward to exploring mutually beneficial strategic opportunities in the future.”
Calling it a “surprising move,” Jefferies Financial Group Inc. analyst John Aiken said it’s unclear whether Scotiabank shareholders will support the bank’s new U.S. strategy. Rivals such as Royal Bank of Canada, Bank of Montreal and Toronto-Dominion Bank have all acquired U.S. banks over the past two decades.
“While this is a very different approach to gaining traction in the U.S. market than has been taken by its peers, we are not sure about how much Scotiabank will gain in synergies,” Aiken wrote in a report. “We believe that much of the market’s reaction will be dependent on management commentary on its call this morning.”
Scotiabank has scheduled an analyst call for 9 a.m. in Toronto.
Balance sheet
For KeyCorp, the move “raises questions about a potential full acquisition from the Canadian lender in the future,” Bloomberg Intelligence analysts Herman Chan and Sergio Ferreira wrote in a report.
KeyCorp is weighing restructuring its balance sheet in order to shorten the duration of some of its investment portfolio. The move hearkens back to a year ago, when investors started to sour on KeyCorp and many of its rivals after the Federal Reserve’s moves to rapidly increase interest rates saddled lenders with paper losses as the value of their bond investments took major hits.
KeyCorp’s stock has slumped 16 per cent since the start of 2023, which compares with the 24 per cent advance of the S&P 500 Financials Index.
“While we continue to be comfortable with our current capital position, we determined that the investment enables Key to accelerate our well-communicated capital and earnings improvement while bolstering our strategic position,” KeyCorp CEO Chris Gorman said in a separate statement.
Scotiabank will purchase about 163 million shares of KeyCorp’s common stock in two tranches: an initial investment of $800 million, followed by an additional investment of $2 billion, which requires U.S. Federal Reserve approval. The first tranche is expected to close in Scotiabank’s fiscal fourth quarter, the three months through October, with the balance of the transaction set to close in fiscal 2025.
“In our view, this is a surprising and attractive deal for KEY giving them capital flexibility and puts them on their front foot for improved organic growth,” Keefe, Bruyette & Woods analysts led by David Konrad wrote in a report. They suggested shares of KeyCorp would rise as the deal shows Scotiabank’s confidence in the regional lender’s prospects.
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