On Monday, KeyCorp revealed a significant investment of $2.8 billion from the Bank of Nova Scotia. Scotiabank is set to obtain a 14.9% interest in KeyCorp, which will occur in two phases. The first phase involves an initial investment of $0.8 billion, which will provide Scotiabank with a 4.9% interest, with an anticipated closure by the end of August, contingent upon antitrust approval.
The subsequent $2 billion investment, which will bring the total stake to 14.9%, is expected to finalize in early 2025, depending on Federal Reserve approval. KeyCorp’s CEO Chris Gorman remarked, “This opportunity grants us the ability to secure capital under favorable terms. Although we remain satisfied with our existing capital situation, we view the investment as a means for Key to fast-track our clearly expressed plans for capital enhancement and earnings growth while strengthening our strategic position.”
This minority equity stake is projected to boost KeyCorp’s CET1 capital ratio by 195 basis points, raising it to 12.4% as of June 30, 2024.
Additionally, there are expectations for tangible book value per share to rise by over 10%.
Scotiabank’s investment to support KeyCorp’s growth
KeyCorp is set to assess the possibility of realigning its available-for-sale securities portfolio to facilitate enhancements in profitability, liquidity, and capital.
The capital increase along with the potential portfolio alignment is forecasted to result in a CET1 capital ratio ranging from 11.3% to 11.6%, while positively impacting earnings per share in 2025 and 2026. As part of this agreement, both KeyCorp and Scotiabank plan to investigate prospective commercial partnership opportunities to better serve their respective customer bases. Following the announcement, KeyCorp’s stock jumped 9.1%, achieving the highest performance in the S&P 500 for that day.
In contrast, Scotiabank’s shares dipped by 3.4%, even though executives highlighted the advantages of the deal. Some analysts speculate that Scotiabank might leverage this initial investment as a pathway to eventually gain more control over KeyCorp once a five-year standstill agreement concludes. Others emphasize that the key for investors will be to observe if the anticipated strategic benefits materialize for both entities or if this is merely a financial investment.
