KeyCorp.'s stock jumps 19% as Bank of Nova Scotia to invest $2.8 billion in regional lender

By Ciara Linnane and Steve Gelsi

Canada's Bank of Nova Scotia said the deal will grow its presence in the U.S.

KeyCorp.'s stock jumped 12% Monday, after the regional bank said it agreed to sell a 14.9% stake in itself to The Bank of Nova Scotia for about $2.8 billion in a move to strengthen its balance sheet.

The price for the KeyCorp stake (KEY) of $17.17 a share is a premium over its closing price on Friday of $14.61.

ScotiaBank (BNS) (CA:BNS) said the deal will provide "attractive near-term returns to our shareholders and creates future optionality for Scotiabank in the North American corridor."

KeyCorp's stock rose $1.83 to $16.44.

KeyCorp Chief Executive Chris Gorman said the bank approached KeyCorp "with a unique opportunity to raise capital on attractive terms," according to a statement.

While the bank is comfortable with its current capital position, "we determined that the investment enables Key to accelerate our well-communicated capital and earnings improvement while bolstering our strategic position," he added.

The investment is expected to increase the bank's common equity tier one ratio (CET1) by 195 basis points to 12.4% and increase tangible book value per share by more than 10%.

The CET1 ratio is a measure of a bank's capital strength and solvency.

Citi analyst Keith Horowitz reiterated a buy rating on KeyCorp and raised his price target for the stock by $1 to $19 a share.

"One of the biggest overhangs for KEY was its 7.3% proforma CET1, which we estimate is now closer to about 9.2% so that issue is cured with this investment and also underscores in our view a very clean credit quality book all of which is very positive for KEY's multiple/lower cost of equity," Horowitz said.

In conjunction with the deal, KeyCorp said it will evaluate a repositioning of its available-for-sale securities portfolio with a plan to accelerate the timing of profitability, liquidity and capital improvements, and increasing resiliency, the bank said.

The two moves are expected to result in a net CET1 capital ratio of 11.3%to 11.6%, while being low single-digit accretive to 2025 per-share earnings.

The stock has gained 1.5% in the year to date, while the S&P 500 has gained 12%.

For Scotia Bank, the deal represents a way to build a stake in a major U.S. bank without triggering higher scrutiny from U.S. regulators.

A deal by Canada's Toronto-Dominion Bank (TD) to buy First Horizon Corp. (FHN) fell through this year partly because of regulatory hurdles.

Merger deals among the largest U.S. banks have been mostly on hold due to uncertainty around interest rates.

Now that interest-rate cuts are on the table by the U.S. Federal Reserve and other central banks, it's becoming easier for dealmakers to assess the value of bank portfolios for potential merger deals.

Also read: First Horizon stock plunges after merger deal with TD Bank is mutually terminated

-Ciara Linnane -Steve Gelsi

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08-12-24 0958ET

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