Scotiabank recently acquired a minority stake in a U.S. regional lender, KeyCorp, in an all-stock transaction totaling US$2.8 billion on Monday. This move by the Canadian bank is part of its strategy to seek growth opportunities beyond the saturated domestic market.
Canadian financial institutions have been exploring avenues for expansion in the U.S. due to a slowdown in growth within the domestic banking industry, where the top six banks control over 90% of the market. Last year, rival Bank of Montreal finalized the acquisition of BNP Paribas’ U.S. unit, Bank of the West, for US$16.3 billion, while TD purchased New York-based Cowen, a boutique investment bank, for US$1.3 billion.
The transaction comes at a time when smaller U.S. regional lenders are facing challenges such as higher deposit-holding costs and subdued loan demand due to elevated borrowing expenses. Additionally, they are preparing for stricter capital regulations as regulators finalize the implementation of the Basel III Endgame proposal.
KeyCorp has announced its intention to reassess its available-for-sale securities portfolio to accelerate efforts towards profitability, liquidity, and capital enhancements, in addition to the capital increase from the deal.
KeyCorp, headquartered in Cleveland, Ohio, reported a five percent decline in second-quarter profits and projected a further decrease in average loans for 2024. With total assets of approximately US$187 billion as of June 30, the bank’s shares surged by 12% following Scotiabank’s offer at US$17.17 per share, marking a 17.5% premium over KeyCorp’s last closing stock price.
The investment will be executed in two phases, commencing with an initial 4.9% stake, followed by an additional 10%. Scotiabank anticipates closing the deal in fiscal year 2025.
KeyCorp CEO Chris Gorman mentioned, “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.”
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