Bank of Nova Scotia T.BNS

cibc analyst: target C$68, neutral

[perplexed01]

KEY Is A Financial Investment For Now With Strategic Optionality

Our Conclusion
BNS is investing ~$3.9B for a 14.9% stake in KEY, a U.S. regional bank. It is generally hard to get excited about minority investments. That said, this transaction is being done on a capital-efficient basis (approximately a fiveyear payback), and we estimate it adds a decent amount of EPS accretion (2%-3%). KEY has not been the best-performing bank (nor the worst), but perhaps with the capital injection and collaboration with BNS, that will change. The transaction does not change our Neutral rating, but it does improve economic returns for BNS and provides future strategic optionality should performance improve.

Key Points

Earnings accretion. BNS pointed to $300MM-$350MM in incremental earnings for F2026 based on consensus estimates, leading to estimated EPS accretion of $0.25. Current consensus EPS for F2026 is $7.76, implying EPS accretion of ~3%. There is potential upside to that estimate as KEY management expects the excess capital injection to drive low-single-digit accretion to 2025E consensus EPS. We don’t currently have F2026 estimates but increase our F2025E EPS by ~2%.

Capital-efficient transaction. BNS expects the transaction will reduce CET1 by 50-55 bps. The bulk of the transaction (>80%) will receive favourable capital treatment under Basel III. Given one more quarter of stock issued under the DRIP (~10 bps) and organic capital build (10-15 bps per quarter), we expect a CET1 in excess of 12.75% after the full investment in KEY is complete. Management expects a payback period of roughly five years and 8-9 bps per year of organic capital accretion.

Creates future optionality. KeyCorp’s current market capitalization of US$13.8B is a digestible size for BNS over time. Many people are already under the working assumption that BNS will exit South America in the future. BNS has a stated strategy of allocating more capital to developed markets and less to developing markets. The KEY transaction provides visibility on where BNS might want to deploy capital in the U.S., particularly if it were to sell some of its assets in South America. Note that there is a five-year standstill agreement for up to a 19.9% ownership stake, so acquiring all of KEY would need to be a longer-term plan.

Paying a reasonable multiple to gain a toehold in U.S. banking. We estimate BNS is paying 10.7x P/E based on 2025E consensus, providing a reasonable entry point into U.S. commercial banking. KEY is a top 15 U.S. bank by assets with >75% of net income from commercial banking. We provide a peer analysis with this note which shows KEY has lagged peers across multiple financial metrics over the last five years. There is room for financial improvement and the additional capital coming from BNS should help in this regard.

[ecolo101]

Increase presence in the USA is the right move for long term return. I am a believer  glta i own it