Scotiabank Sells Stake in Canadian Tire’s Financial Arm for C$895 Million
Bank of Nova Scotia Bolsters Capital Amid Economic Uncertainty
Bank of Nova Scotia is raising C$895 million ($647 million) by selling its 20% stake in Canadian Tire’s financial services unit, a move aimed at bolstering its capital as the economy faces a potential recession. This strategic decision highlights how Canadian lenders are proactively preparing for tougher economic times by shedding non-core assets to strengthen their balance sheets. Peer Bank of Montreal has also recently announced plans to exit the recreational vehicle lending segment.
Canadian Tire Explores Strategic Alternatives
Canadian Tire, the retailer that owns the financial services unit, has stated that it will evaluate strategic alternatives for Canadian Tire Financial Services (CTFS). The evaluation will be carried out in collaboration with Goldman Sachs, the company’s financial advisor. The decision to sell back the stake to Canadian Tire will offer the retailer greater control and flexibility in building out its loyalty program, according to Canadian Tire CEO Greg Hicks.
Scotiabank’s Capital Boost and CET1 Ratio
Scotiabank anticipates that the deal will improve its CET1 ratio, a key gauge of a bank’s financial strength, by approximately 16 basis points. This is crucial considering that the bank recently reduced its workforce by 3%, which was projected to have a 10 basis points impact on its CET1 ratio. Analysts suggest that this transaction will provide more capital relief than previously announced charges and will likely aid Scotiabank in achieving a 13% CET1 ratio for Q4.
Scotiabank’s Long-Term Strategy
The stake in CTFS was acquired by Bank of Nova Scotia for C$500 million in 2014 as part of its strategy to increase its market share in the credit cards sector and gain access to a larger customer base. However, the sale of this stake is not considered critical to Scotiabank’s long-term strategy. The bank is expected to unveil a fresh strategy at its December investor day, the first such event since CEO Scott Thomson assumed leadership in February.
Canadian Tire’s Ownership and Transaction Impact
Canadian Tire’s full ownership of CTFS will provide advantages, but the retailer will likely face higher debt costs to finance the transaction. Canadian Tire will also record a charge of C$328 million related to the transaction, amounting to C$5.88 per share, which will be reflected in its third-quarter 2023 results. Following this announcement, shares of Canadian Tire experienced a 2.5% decline, while Scotiabank’s shares edged lower.
Overall, this transaction between Bank of Nova Scotia and Canadian Tire’s financial services unit signifies a strategic move for both parties, enabling them to focus on their core business areas and strengthen their financial positions in the face of economic uncertainty.
