Monday, October 06, 2008

Scotiabank Buys Sun Life's CI Financial Stake

Bloomberg, Frederic Tomesco and Sean B. Pasternak, 6 October 2008

Bank of Nova Scotia, Canada's third- biggest bank, agreed to buy Sun Life Financial Inc.'s stake in money manager CI Financial Income Fund for C$2.3 billion ($2.1 billion), the biggest acquisition in the bank's 176-year history.

Scotiabank will pay C$22 a share in cash for a 37 percent stake in CI Financial, said Chris Hodgson, head of domestic banking, in a conference call today. That's 32 percent higher than CI's closing price on Oct. 3.

With the purchase, Scotiabank will become the largest shareholder of Toronto-based CI, the second-biggest mutual-fund company in Canada with about C$63 billion in assets. Scotiabank Chief Executive Officer Richard Waugh has said building the asset management business is one of the priorities for the bank.

``It's an opportunistic pick-up for Scotia,'' said Jeffery Lusher, a fund manager at BMO Harris Private Bank in Montreal, which oversees about C$2.1 billion and holds shares of Bank of Nova Scotia and Sun Life. ``They have a lot of capital, and stock prices have been trading lower in recent weeks, so the timing is good.''

Scotiabank fell C$2.16, or 4.6 percent, to C$45 at 4:15 p.m. trading on the Toronto Stock Exchange. Sun Life fell C$1.89, or 5.3 percent, to C$34.13. CI Financial fell 44 cents, or 2.6 percent, to C$16.20.

The transaction may allow Toronto-based Scotiabank to eventually buy all of CI, analysts such as Dundee Securities Corp.'s John Aiken said. Scotiabank may also sell its mutual fund operations to CI to save costs, as the Globe and Mail reported in August.

``Scotia has a whole range of options open to them,'' Aiken said in a phone interview. ``You've got that Sun Life stake, where you can take it out at your leisure. But why waste the capital on that when you've got other opportunities -- such as U.S. retail banking -- which you can get on the cheap?''

Sun Life approached Scotiabank for the sale, which was completed over the weekend, Scotiabank said. Just last month, Sun Life executive Kevin Dougherty called CI one of Sun Life's ``growth engines,'' and said the insurer was comfortable with its stake.

Scotiabank, which owns the smallest mutual-fund business among the country's five main banks, is increasing its asset- management business through acquisitions. Last month, it purchased the Canadian operations of E*Trade Financial Corp. for about $442 million, doubling its domestic online-brokerage business. The bank bought 18 percent of Toronto-based money manager DundeeWealth Inc. last year.

The CI purchase will add about 4 cents a share to earnings in the first year, and 8 cents by the third year, Hodgson said on the call.

Sun Life, Canada's third-biggest insurer, said the sale will give it more cash to buy assets amid the turmoil in the financial markets. Toronto-based Sun Life said last month it expects to report writedowns in the third-quarter on its investments in U.S. firms including American International Group Inc. and Lehman Brothers Holdings Inc.

Sun Life CEO Donald Stewart said the sale wasn't needed to raise capital for the Toronto-based firm, which ended the second quarter with about C$1 billion in excess capital. Sun Life will post a pretax gain of C$1.1 billion from the sale.

``Unlocking CI's value now provides Sun Life with enhanced firepower to aggressively pursue our growth objectives,'' Stewart said.

Stewart said the insurer is looking to expand its U.S. annuities and group insurance business, as well as Asia.

Andre-Philippe Hardy, an analyst at RBC Capital Markets, has said that Sun Life may look at AIG's assets. AIG, the largest U.S. insurer by assets, has been forced to sell businesses to repay an $85 billion U.S. government loan. AIG may sell its U.S. life insurance and annuities units, people familiar with the situation said last week.

``There are a lot of opportunities out there,'' Stewart said. He declined to comment on AIG.

Sun Life may announce a transaction in the U.S. in the next 30 to 60 days, said Genuity Capital Markets analyst Mario Mendonca.

Financial Post, Jonathan Ratner, 6 October 2008

Bank of Nova Scotia's move to buy out Sun Life Financial Inc.'s 37% stake in mutual-fund giant CI Financial Income Fund partners Scotia with one of Canada's market leaders in wealth management and "catapults" the bank into a major player in the asset management sector, according to analysts at Dundee Capital Markets.

It could be a precursor to Scotiabank, which has already shown it intentions to grow its domestic wealth management business, increasing its stake in CI even more.

With a 37% minority interest in CI, Scotia can now arrange a "strategic transaction" with CI by either buying the income trust outright, or executing the sale of its own mutual fund operations to CI, Mr. Aiken said in a note to clients on Monday. With Sun Life out of the picture, the latter is the more likely scenario, he wrote.

Scotiabank is now able to negotiate the sale unhindered, which would likely result in Scotia owning a majority stake in CI once a second deal is done.

"We believe that an additional step not only makes sense, but is likely to happen," he wrote, allowing Scotiabank "to participate in Canadian mutual fund consolidation without injection of additional capital."

Yet the move could take some time, said Mr. Aiken who put a "neutral" rating on Scotiabank shares with a 12-month price target of $49.

"With the uncertainty in the current market place and the opportunities available to BNS, the timing is suspect and may not be as immediate as many investors assume."

Financial Post, Eoin Callan, 6 October 2008

The worsening turmoil in financial markets Monday altered the balance of power in Canada's wealth management sector, as one of the country's largest insurers was compelled to sell off a highly-prized stake in the third-biggest mutual fund company for $2.3-billion in cash to Bank of Nova Scotia.

The sale of a 37% stake in CI Financial Income Fund by Sun Life provides the insurer with a capital injection as the costs of bad bets on financial markets climb for the Canadian insurance sector as investment portfolios bleed cash.

"What it probably does reflect is Sun Life having a real need for cash. I think it is a huge win for Scotia," said John Hall, a partner with Borden Ladner Gervais who advises securities companies.

The deal positions Scotiabank to vault from the periphery of the wealth management industry to a leading role in a sector expected to benefit as Baby Boomers invest for their retirement.

The minority stake in CI gives Canada's third-largest bank a clear "path to control" to one day seize all of the fast-growing investment manager and combine it with Scotia's other asset management operations, according to a person close to the bank.

The transaction is a coup for Rick Waugh, the chief executive of Scotia, who through strategic manoeuvring and back-room talks is overcoming Scotia's weakness in a sector the bank argues represents the future of the industry.

"This announcement is a significant step forward and demonstrates Scotiabank's ongoing commitment to growing our wealth-management business," said Mr. Waugh.

Scotiabank will pay Sun Life $22 a share in cash, a significant premium over the $16.64 closing price last week for shares in CI, which oversees about $100-billion in assets.

The fast growing standalone company led by Bill Holland has risen quickly up the ranks of Canada's asset managers and may fight to keep its independence, according to analysts.

The sale of the stake by Sun Life comes after the insurer racked up losses alongside rival Manulife Financial on exposures to failed U.S. financial institutions including Lehman Brothers and Washington Mutual. The company's market value has fallen by a third since the spring amid a heavy sell-off in the financial sector as a wave of historic collapses of banks and insurance companies shake investor confidence.

The cash deal was agreed over the weekend and finalized in the early hours Monday after months of foot-dragging by Donald Stewart, chief executive of Sun Life, following an earlier approach from Scotia.

As market values plunge across the insurance sector, companies are seeking to position themselves as drivers of consolidaton even as their own investment portfolios suffer.

Leading U.S. life insurers have seen their values drop precipitously in recent days, with Prudential down 40% this month.

This is creating potential buying opportunities for insurers that can keep cash on hand and retain investor confidence while rivals sink.

"Unlocking CI's value now provides Sun Life with enhanced firepower to aggressively pursue our growth objectives," said Mr. Stewart.

The company is among a wide range of buyers interested in participating in a fire sale of assets by American International Group, the failed U.S. insurer that is auctioning off key assets in the U.S. and overseas.

One of the most sought-after assets is AIG's Asia life insurance operations that have 20 million policyholders across 13 countries.

AIG said it hopes to sell a minority stake that analysts estimate could sell for up to US$20-billion amid signs of strong demand.

The Globe and Mail, Tara Perkins, 6 October 2008

Sun Life Financial Inc. agreed Monday to sell its 37 per cent stake in mutual fund giant CI Financial Income Fund to Bank of Nova Scotia for $2.3-billion in cash.

The deal comes as Sun Life hunts for acquisition opportunities amid consolidation in the financial services industry resulting from the credit crisis.

“Sun Life is well-positioned to take advantage of unprecedented opportunities existing within the global financial services sector today,” said chief executive officer Donald Stewart. “Unlocking CI's value now provides Sun Life with enhanced firepower to aggressively pursue our growth objectives.”

CI announced in late August that it had been in discussions with a number of parties about possible strategic combinations. Last month, CI's efforts to buy Bank of Nova Scotia's mutual fund arm fell flat. That deal would have seen Scotiabank pick up a significant equity stake in CI, the No. 3 player in Canada's mutual fund business.

Now, Scotiabank is picking up the stake while retaining control of its own fund business.

“This announcement is a significant step forward and demonstrates Scotiabank's ongoing commitment to growing our wealth management business,” said Scotiabank CEO Rick Waugh.

Sun Life acquired roughly one-third of CI since mid-2002 in exchange or selling its mutual fund subsidiaries Spectrum Investment Management Ltd. and Clarica Diversico Ltd. to CI. The transaction included a distribution agreement that gave CI preferred access for its financial products among Sun Life's advisers.

The current deal is expected to close in 45 days.

CI Financial CEO Bill Holland said in an interview Monday that he expects the business relationships with Sun Life to continue, and will be talking strategy with Scotiabank in the next couple of weeks.

Asked whether CI might continue talks to buy Scotiabank's fund arm, he replied: “I think we'll sit and talk about anything that makes the combined companies better. We have had a very good relationship with Scotia. They have been our banker for many, many years.”

Sun Life spokesman Michel Leduc said that the company now anticipates “taking advantage of unprecedented opportunities existing within the global financial services sector. We are looking to deploy the proceeds towards enhancing our growth strategy, both organically and opportunistically through acquisition.”

Dundee Capital Markets analyst John Aiken said the acquisition of Sun Life's stake now transforms the bank “into a major player in the asset management sector.”

Scotiabank “can now arrange a strategic transaction, either buying CI outright or selling its mutual fund operations to CI – which we believe is more likely – without the impediment of Sun Life as a minority shareholder dictating terms,” Mr. Aiken wrote in a report.

CI Financial, which has $58.5-billion in assets, had been trying to buy Scotiabank's fund arm, which is the 12th-largest fund company with $22-billion in assets. If the purchase occurred, CI Financial would still be the third-largest player after RBC Asset Management, the fund arm of Royal Bank of Canada, and IGM Financial Inc.

“For Sun Life Financial, the deal increases capital for growth opportunities in the financial sector,” Mr. Aiken added. “While it does lose cash flows from CI's distributions [because it is an income trust], we note that not all profitability is lost as it will still earn distribution fees from funds sold.”

For CI Financial, the transaction bolsters the firm's strong product and distribution network “but continued access to Sun Life's distribution is absolutely critical to CI's near term performance, given the strength of its segregated fund sales,” Mr. Aiken said.

Scotiabank, which also owns a 20-per-cent stake in DundeeWealth Inc., has the potential to try to eventually combine its own family with CI and DundeeWealth's Dynamic funds, said Robert Almeida, a portfolio manager with AIC Ltd. and whose AIC Advantage funds own a 5-per-cent stake in CI.

“If you put them altogether, you would have a real competitor to IGM Financial and RBC,” said Mr. Almeida, referring to the two largest fund companies in Canada.
Dow Jones Newswires, 30 September 2008

The Mexican arm of Canada's Bank of Nova Scotia (BNS) plans to open about 57 new branches this year, even as it sees slower growth ahead, a top company official said Tuesday.

Nicole Reich de Polignac, chief executive of Grupo Financiero Scotiabank, said at a press conference that the recent volatility in global financial markets hasn't changed the bank's growth plans.

"We're only adapting our tactics," she said, noting that the bank's growth could be "more or less slower" in the short term.

Scotiabank opened 86 branches last year and currently has about 631 branches.

The Association of Mexican Banks expects overall bank lending to expand 15% to 20% this year, down from 24% in 2007, as the economy grows at a slower pace and as banks adopt stricter loan standards amid a surge in bad credit card debt.

Ricardo Garcia, Scotiabank's executive director of consumer lending, said demand for credit, particularly mortgages, is virtually guaranteed by the country's young and growing population.

"Babies are going to keep being born; families are going to continue to be formed," Garcia said. "(The) demand is there and guaranteed for many years."

Scotiabank, which claims a 21% market share of all the new mortgages made by banks in Mexico, on Tuesday launched a new adjustable rate home loan.

The new loan carries an interest rate of 11% to 13.5% depending on the borrower's credit history, overall indebtedness, and the size of the down payment, Scotiabank's mortgage loan director Enrique Margain said.

Starting in the fourth year, however, the interest rate might be raised or lowered every 12 months by 25 basis points depending on whether a client has paid on time.

"The client builds his or her own interest rate through punctual payment," Margain said.

Mexico has enjoyed a housing and mortgage boom in recent years, thanks to a stable economy, a shortage of around 5 million homes and easy access to financing from government and private sector lenders.

Scotiabank had MXN31.73 billion in mortgages on its balance sheet at the end of June, equivalent to 34% of its total loan book, according to the National Banking and Securities Commission.