MW Fed clears KeyCorp's $2 billion cash infusion from Scotiabank earlier than expected and its stock is up
By Steve Gelsi
Analyst hails Fed's quicker-than-expected OK of investment in KeyCorp by Bank of Nova Scotia as a good sign for deal-making
KeyCorp has won approval from the U.S. Federal Reserve for a $2 billion investment from the Bank of Nova Scotia more rapidly than expected.
KeyCorp' $(KEY.AU)$ had expected the OK to come in the first quarter, but in a rapid move by federal regulators, it won clearance for the deal this week.
"We see the approval as boding well for bank mergers," TD Cowen Jaret Seiberg said in a research note.
KeyCorp's stock was up 0.3% on Friday despite losses across the financial sector. The Financial Select Sector SPDR Fund XLF fell 0.2%.
Citi analyst Keith Horowitz reiterated a neutral rating on KeyCorp and said he expects the bank to boost its net interest income once the capital infusion from Scotiabank closes.
KeyCorp will also get a boost from an expected rise in capital markets activity, he said.
But Horowitz held off on a ratings upgrade for the bank because "we see better risk/reward elsewhere at this time."
Overall, the Fed's approval of the KeyBank deal move reveals its "technocratic" approach to deal-making as it relies more on facts and figures rather than a political agenda to review deals, Seiberg said.
The Fed's approach runs counter to recent moves by the White House and the Federal Trade Commission to block the purchase of Albertsons $(ACI)$ by Kroger Co $(KR)$, as well as the Nippon Steel acquisition of U.S. Steel $(X)$.
In the banking sector the $13.4 billion purchase of First Horizon $(FHN)$ by Toronto-Dominion (TD Bank) $(TD)$ was called off in 2023 due to regulatory hurdles.
The bank sector has seen few major mergers reach completion since U.S. Bancorp $(USB)$ closed its $8 billion acquisition of Union Bank, formerly a unit of Mitsubishi UFJ Financial Group $(MUFG)$, in late 2022.
While Scotiabank will soon own 14.9% of KeyCorp, it's not able to buy the rest of the bank any time soo due to an agreement to keep its ownership stake at no more than 19.9% for five years, according to KeyCorp.
KeyCorp has already gotten $821 million from Scotiabank for a 4.9% stake in August and needed approval from the Fed for the remaining 10% valued at $2 billion.
The banks will also pool their expertise to grow their businesses, said KeyBank Chief Executive Christopher M. Gorman.
Some potential avenues include leveraging Scotiabank's presence in Mexico, Canada and Central America, as well as opportunities to pool resources on payments, wealth managements and investment banking.
Another potential growth-driver would be to help finance manufacturing operations that move back to North America.
"We think there is a meaningful opportunity to work together to capture the reshoring opportunity, a trend that I am convinced will continue to occur over the next decade," KeyBank Chief Executive Gorman said at an August presentation to Wall Street analysts.
KeyBank is also using some of the capital to strengthen its balance sheet in a move that will boost its earnings potential.
-Steve Gelsi
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(END) Dow Jones Newswires
December 13, 2024 11:10 ET (16:10 GMT)
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