DBRS Comments on Bank of Nova Scotia’s Dundee Wealth Acquisition

DBRS has reviewed today’s announcement by the Bank of Nova Scotia (BNS or the Bank) that it has reached an agreement to acquire the portion of Dundee Wealth Inc. (DWI) that is does not currently own, estimated at approximately 82% of DWI. There are no rating implications for BNS.

The transaction is consistent with BNS’s strategy of growing its wealth management businesses, which the Bank believes offers attractive opportunities. DBRS views BNS’s wealth management businesses as a key component of the Bank’s domestic growth strategy.

BNS will gain significant market share to 7.8% and become the fifth largest mutual fund provider in Canada and the third largest among the Canadian banks with over $55 billion in assets under management, up from tenth position. The Bank is currently under-represented in retail mutual funds.

The transaction provides BNS with added capabilities in the advisor channel, which is the primary distribution channel for DWI. Over the last three years, BNS has been investing to strengthen its distribution capabilities in wealth management, including both the direct and advisor channels. Both mutual fund brands, ScotiaFunds and Dynamic, will be maintained.

BNS is paying approximately $2.3 billion, with the proceeds primarily in BNS shares (common equity and preferred). The transaction does allow an option for minority shareholders to take a portion of the payment in cash as opposed to BNS preferred shares. The transaction is expected to be neutral to earnings in year one and accretive thereafter ($0.12 per share in year three). There are anticipated efficiencies in technology, administrative and shared service costs. While BNS expects some revenue synergies, the accretion estimates do not include any. If the cash portion is fully taken, there is a modest decrease of approximately ten basis points (bps) to BNS’s Tier 1 capital ratio (11.7% at the end of Q3 2010) and approximately 80 bps decrease in tangible common equity to risk weighted assets (8.0% at the end of Q3 2010, as calculated by DBRS). The transaction is subject to regulatory and other approvals and is expected to close in January 2011.

Headquartered in Toronto, Canada, Bank of Nova Scotia has a full-service retail banking operation and wealth management in Canada, international retail banking franchises (Mexico, the Caribbean, Central America, South America and Thailand) and a full-service domestic corporate and investment bank with global precious metal capabilities. Scotiabank is the most internationally diversified of Canada’s major banks.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (January 14, 2010), Methodology: Ratings for Bank Subordinated Debt & Hybrid Capital Instruments with Discretionary Payments (Apr 12, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009), and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on the DBRS website under Methodologies.