Scotiabank is buying a 14.9% stake in American regional lender KeyCorp for $2.8 billion, as the Canadian bank taps into the stressed regional U.S. banking sector for growth outside its saturated home market. Scotiabank has agreed to the deal as it looks to boost its focus on developed economies and strengthen its North American footprint.
KeyCorp shares jumped 14% as Scotiabank priced the offer for investment at $17.17 per share. This is a nearly 17.5% premium to KeyCorp’s last closing stock price. It will also be able to appoint two directors to KeyCorp’s board. Scotiabank’s stock was down about 3% in Toronto.
Canada’s investment in U.S. increases
Smaller U.S. regional lenders have been struggling with higher cost of holding deposits and weak loan demand due to elevated borrowing costs.
Meanwhile, the Canadian lender is the latest among the big five to invest in the United States as growth slows in the domestic banking industry where the lenders control a majority of the market.
Last year, Scotiabank’s rival Bank of Montreal bought Bank of the West for $16.3 billion, while TD acquired New York-based boutique investment bank Cowen for $1.3 billion. Royal Bank of Canada owns Hollywood bank City National.
Scotiabank investment plan
Scotiabank’s CEO Scott Thomson last year laid out a growth plan to focus on North American markets with an emphasis on the region’s $1.6 trillion annual trade over its less profitable Latin American operations.
“We had thought that it would initially be focused on building out its wealth management and/or capital markets businesses in the region, rather than announcing an interest in a US regional bank,” Cormark Securities analyst Lemar Persaud said.
Scotiabank and KeyCorp deal a strategic move
Thomson said moving capital from developing markets to developed markets is a huge part of the strategy and the latest investment was “a low risk, low cost optionality in North America” with strong returns.
“We spent a lot of work thinking about the US,” he told analysts.
The banks also plan to explore commercial opportunities to partner together in the future.
Increasing footprints
Scotiabank has the largest international footprint among its Canadian peers, but its businesses in Latin America have too many clients using only one banking product, Thomson said in December.
He also said that although the bank has done plenty of work to reposition itself, the returns on the capital deployed haven’t “measured up” in the past decade, so Scotiabank’s total shareholder return has underperformed.
KeyCorp CEO Chris Gorman noted that the bank would explore opportunities across investment banking, wealth and payments leveraging Scotiabank’s presence across Canada, Mexico and Central America and now in the U.S.
How Scotiabank and KeyCorp deal will take place?
The deal will take place in two stages, with an initial investment for a 4.9% stake, followed by an additional 10%. After the closure of the deal in fiscal 2025, Scotiabank will become KeyCorp’s largest investor, according to LSEG data.
KeyCorp said it would also look to reposition its available-for-sale securities portfolio to speed up its push for profitability, liquidity and capital improvements.
The U.S. banking industry is staring at the chances of tougher capital norms as regulators finalize the roll out of the so-called Basel III Endgame proposal.
KeyCorp stock update
The price for the KeyCorp stake $17.17 a share is a premium over its closing price on Friday of $14.61. KeyCorp’s stock rose $1.94 to $16.55 as the top gainer Monday among components of the S&P 500.
Wall Street’s main indexes closed mixed on Monday as investors braced for more key economic data in the hope of gauging the Federal Reserve’s next policy moves.
