Scotiabank Acquires 14.9% Stake in KeyCorp for $2.8B

Canada's Scotiabank invests $2.8 billion for a 14.9% stake in US regional lender KeyCorp, marking a significant expansion in the US market.

In a strategic move that has the financial world buzzing, Scotiabank is set to acquire a 14.9% stake in the American regional lender KeyCorp for a cool $2.8 billion. This acquisition marks Scotiabank's foray into the beleaguered U.S. banking sector, as the Canadian institution seeks growth avenues beyond its saturated domestic market.

Scotiabank Acquires 14.9 percent Stake in KeyCorp for $2.8B

KeyCorp's stock experienced a notable surge, jumping 14% following the announcement, with Scotiabank pricing its offer at $17.17 per share—an enticing 17.5% premium over KeyCorp's last closing price. As part of this deal, Scotiabank will gain the privilege of appointing two directors to KeyCorp's board, a move that could influence the lender's strategic direction. Interestingly, Scotiabank's own shares dipped approximately 3% in Toronto, perhaps a reflection of investor sentiment regarding the risks associated with such acquisitions.

The backdrop to this acquisition is a challenging landscape for smaller U.S. regional banks, which are grappling with the dual pressures of rising deposit-holding costs and a tepid demand for loans, exacerbated by elevated borrowing costs. In this context, Scotiabank joins the ranks of its Canadian counterparts, who have been increasingly eyeing opportunities in the U.S. market as growth in the domestic banking sector slows. Notably, last year, the Bank of Montreal made headlines with its $16.3 billion purchase of Bank of the West, while TD Bank acquired the New York-based boutique investment bank Cowen for $1.3 billion. Royal Bank of Canada, not to be left out, has its sights set on Hollywood through its ownership of City National Bank.

Scott Thomson, Scotiabank's CEO, has articulated a growth strategy that prioritizes North American markets, particularly given the region's impressive $1.6 trillion annual trade, in stark contrast to the less lucrative Latin American operations. Furthermore, the banks are contemplating future commercial collaborations, which could yield fruitful partnerships down the line.

The acquisition will unfold in two phases: an initial investment securing a 4.9% stake, followed by an additional 10%. Once the deal is finalized in fiscal 2025, Scotiabank will emerge as KeyCorp's largest investor, according to data from LSEG. In a bid to enhance profitability and liquidity, KeyCorp has also indicated plans to reposition its available-for-sale securities portfolio.

As the U.S. banking industry braces for potentially stricter capital regulations with the impending rollout of the Basel III Endgame proposal, this acquisition could be a pivotal moment for both Scotiabank and KeyCorp, setting the stage for a new chapter in their respective growth narratives.