Morningstar DBRS Comments on the Bank of Nova Scotia's Purchase of a Minority Stake in KeyCorp; Sees No Impact on Credit Ratings

DBRS Limited (Morningstar DBRS) notes that the Bank of Nova Scotia's (Scotiabank or the Bank; rated AA with a Stable trend) announced purchase of an approximate 14.9% stake in American regional lender KeyCorp (KEY; rated A (low) with a Stable trend) has no impact on the Bank's credit ratings or trends.

On August 12, 2024, Scotiabank announced that it had entered into an agreement to make a strategic minority investment in KEY of approximately $2.8 billion in cash (CAD 3.9 billion) through an issuance of common shares, which would represent an approximate pro forma ownership stake of 14.9%. The transaction will be completed in two stages, with an initial investment of $0.8 billion (CAD 1.1 billion or 4.9% ownership) to be completed in the fourth quarter of fiscal year 2024. The second step would follow upon approval from the Federal Reserve, when an additional $2.0 billion (CAD 2.8 billion) investment will be made, which is expected to be completed in fiscal year 2025. Following the purchase closure, Scotiabank will become one of KEY's largest investors.

Morningstar DBRS views this transaction as providing future growth opportunities for the Bank in the North American corridor across investment banking, wealth management, and payments. Under new senior leadership, Scotiabank's current strategy refresh focuses on lower risk, less volatile geographies with growth priorities in Canada, the United States, and Mexico, where about 90% of incremental capital will be allocated. The CET1 ratio impact at closing of the first stage of the transaction is estimated to be approximately 10 basis points (bps), and a further 40 bps to 45 bps at the closing of the second investment.

When the second stage of the investment is complete, Scotiabank will be able to designate two KEY board members, with one being a senior officer of the Bank and the other being a third party director that is reasonably acceptable to KEY.

Notes:
All figures are in U.S. dollars unless otherwise noted.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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