Friday, April 11, 2008

Scotiabank Eyes US Acquisition

The Globe and Mail, Tara Perkins, 11 April 2008

Bank of Nova Scotia, Canada's most international bank, is considering diving in to the lucrative but troubled U.S. banking sector.

Scotiabank has long focused on building its network in Mexico, Central America and the Caribbean, and more recently in Asia. Now it is sticking its neck out to take a look at National City Corp., a Cleveland-based bank that's been stung by the U.S. housing crisis. It has a network that stretches through Ohio, Florida, Illinois, Indiana, Kentucky, Michigan, Missouri and Pennsylvania.

Analysts were cautiously optimistic about the prospect.

“If there were ever a time to do it, now would be the time,” CIBC World Markets analyst Darko Mihelic said.

“If Scotiabank's buying this, they're going to buy it for a great price,” he said. “When you combine that with the typical Scotiabank due diligence, it's probably going to be a good thing for Scotia.”

National City said at the start of the month that its board was reviewing a range of strategic alternatives and had hired Goldman Sachs as an adviser. Its stock has plunged 75 per cent in the past year, and it appears to be under pressure to recapitalize or find a buyer before it reports its first-quarter earnings on April 22, said National Bank Financial analyst Rob Sedran.

The Wall Street Journal first reported yesterday that Scotiabank has joined a relatively small list of U.S. banks and private equity firms that have expressed an interest in buying a stake in the bank or doing a full takeover. KeyCorp and Fifth Third Bancorp have made offers while New York private equity firm Corsair Capital LLC is considering one, the report said.

Scotiabank declined to comment on the report, but industry sources confirmed the bank is interested. And its lack of a retail banking network in the U.S. might give it an advantage over U.S. rivals who would have to close branches and cut employees because of overlap.

A deal would propel Scotiabank into consumer banking in the U.S.

The bank “has a reputation as a shrewd acquirer, which we believe makes this interest understandable,” Mr. Sedran said in a note to clients. The big challenge will be accurately assessing how much risk National City carries.

“Obviously, National City is struggling,” Mr. Sedran wrote. “However, if it can be recapitalized and stabilized, the long-term strategic advancement would be significant.”

Bank of Montreal analyst Ian de Verteuil estimates National City might need an equity infusion of about $4-billion. “This is the upper end of what we believe [Scotiabank] would be prepared to invest,” he wrote in a note to clients.

Numerous analysts said National City's Midwest presence meshes nicely with Bank of Montreal's U.S. bank, Harris Bank. They suggested that BMO is missing an opportunity because of its problems related to the credit crunch. But they also suggested that, if Scotiabank does the deal, a combination with BMO could be more likely down the road.

“Scotia had long ago been interested in buying BMO. If [Canadian bank] mergers ever do come back, I think that that would in fact make it more plausible for Scotia to buy BMO,” Mr. Mihelic said. Federal rules currently prohibit Canada's big banks from merging.
Reuters, Nicole Mordant, 11 April 2008

A stake in troubled bank National City Corp could be a shrewd and cheap way to give Bank of Nova Scotia its first foothold in U.S. retail banking, analysts said on Friday.

The Wall Street Journal reported late on Thursday that Canada's second biggest bank has jumped into the bidding for National City, which is under regulatory pressure to bolster its capital, or find a buyer, before reporting quarterly results this month.

Scotiabank spokesman Frank Switzer said the Toronto-based bank doesn't comment on rumor or speculation.

But analysts said the report was likely true, even though Scotiabank's strategy for expanding its retail banking operations internationally has excluded the United States in favor of countries in Latin America and the Caribbean.

"It is a little off strategy for Scotiabank to be looking at National City. But Scotia has also said if they do go into the United States it will likely be by buying into a distressed asset," said CIBC analyst Darko Mihelic.

"Scotia buys stuff all over the world at distressed prices and their due diligence is extremely strong. Taken together, I would be supportive of a deal, as long as the price is right," Mihelic told Reuters.

Shares of Scotiabank fell harder than those of its peers on the Toronto Stock Exchange, closing down C$1.21, or 2.6 percent, at C$45.52 on Friday, amid a broad selloff.

The Wall Street Journal said Scotiabank, which has a market value of about C$46 billion ($45 billion), is eyeing at least a stake in National City.

Ohio-based National City has seen its market value plunge 48 percent this year to about $5 billion under the strain of mortgage losses, exposure to the hard-hit Ohio and Michigan real estate markets, and a badly timed foray into Florida.

Its shares fell 46 cents, or 5.2 percent, to $8.45 on the New York Stock Exchange on Friday.

"National City would probably view Scotiabank as a white knight that would allow a recapitalization of the bank without the culture clashes that would arise from an in-market merger," BMO Capital Markets analyst Ian de Verteuil said in a note to clients.

He suggested that National City could need a capital infusion of about $4 billion, which he believed was the "upper end" of what Scotiabank would be prepared to invest.

A handful of U.S. banks and private-equity firms already have expressed interest in helping to shore up National City's balance sheet, the Journal said.

On April 1, National City said its board was reviewing a range of strategic alternatives.

Blackmont Capital analyst Brad Smith said it would make sense for Scotiabank to start off with a minority interest to get "better plugged into" the U.S. market.

Scotiabank's peers, such as Royal Bank of Canada and Toronto-Dominion Bank , already have sizable retail operations in the United States although analysts differ on how successful those forays have been.

There has been much speculation recently in Canada on whether the big domestic banks, which have weathered the global credit crunch much better than their U.S. counterparts, might look for bargains down south.

Corsair Capital LLC, a New York private-equity firm focused on the financial-services sector, is also considering making a bid for National City, the Journal said.

Fifth Third Bancorp and Cleveland rival KeyCorp have also been mentioned as interested parties.
Financial Post, Jonathan Ratner, 11 April 2008

Reports that the Bank of Nova Scotia has joined private equity players in the bidding for a stake in troubled Cleveland-based lender National City Corp. may come as little to surprise to some, since the Canadian bank may be in a more secure position for a major acquisition than some of its U.S. rivals that have been hit by the credit crisis.

Scotiabank is also the most international of Canada’s banks, so it may be trying to establish a retail and commercial banking presence in the U.S. like its domestic rivals.

National City, with a market cap of roughly US$5.5-billion, has demonstrated several distress signals related to the U.S. housing and subprime mortgage slump, said Desjardins Securities analyst Michael Goldberg. It also cut its most recent quarterly dividend by 49% and on April 1 announced that Goldman Sachs had been hired as an advisor to review strategic alternatives.

But if Scotiabank is considering an investment in National City, Mr. Goldberg thinks it would be an opportunistic move, not a strategic one like its investment in Japan’s Shinsei Bank because the risks are too unclear and the franchise is mediocre. National City looks like it needs an injection of capital, much like lender Washington Mutual Inc., which raised US$7-billion this week after its subprime loan losses drained its capital.

Scotiabank also has risk management expertise that could be valuable to National City, Mr. Goldberg said in a note to clients, adding that both of these roles could prove very lucrative to the Canadian bank.

In a time when the market is very nervous about retail banking in the U.S., such a move would be a major strategy shift. But Jason Bilodeau, analyst at TD Newcrest, said he is giving management the benefit of the doubt given its strong track record and ability to “scrub the books” on acquisitions. He called National City an “interesting” asset for Scotiabank to start with given its challenging balance sheet and loan book.

So while investors may be skeptical about a deal, “strategically it makes sense to us to buy assets when others are weakened and looking to sell,” the analyst said in a note, adding that Scotiabank has an estimated $4 to $5-billion of excess capital on hand. However, given the current environment, they may want to maintain a solid cushion.

Mr. Bilodeau also thinks other Canadian banks will become more active in buying U.S. retail assets as prices come down, with Bank of Montreal and Royal Bank expected to lead the way.