By Manya Saini and Nivedita Balu
(Reuters) -Scotiabank is buying a 14.9% stake in American regional lender KeyCorp (NYSE:KEY) for $2.8 billion, as the Canadian bank taps into the stressed regional U.S. banking sector for growth outside its saturated home market.
KeyCorp shares jumped 14% as Scotiabank (TSX:BNS) priced the offer at $17.17 per share, a nearly 17.5% premium to KeyCorp's last closing stock price. It will also be able to appoint two directors to KeyCorp's board. Scotiabank's shares were down about 3% in Toronto.
Smaller U.S. regional lenders have been struggling with higher cost of holding deposits and weak loan demand due to elevated borrowing costs.
Meanwhile, the Canadian lender is the latest among the big five to invest in the United States as growth slows in the domestic banking industry where the lenders control a majority of the market.
Last year, Scotiabank's rival Bank of Montreal (TSX:BMO) bought Bank of the West for $16.3 billion, while TD (TSX:TD) acquired New York-based boutique investment bank Cowen for $1.3 billion. Royal Bank of Canada (TSX:RY) owns Hollywood bank City National.
Scotiabank's CEO Scott Thomson last year laid out a growth plan to focus on North American markets with an emphasis on the region's $1.6 trillion annual trade over its less profitable Latin American operations.
"We had thought that it would initially be focused on building out its wealth management and/or capital markets businesses in the region, rather than announcing an interest in a US regional bank," Cormark Securities analyst Lemar Persaud said.
Thomson said moving capital from developing markets to developed markets is a huge part of the strategy and the latest investment was "a low risk, low cost optionality in North America" with strong returns.
"We spent a lot of work thinking about the US," he told analysts.
The banks also plan to explore commercial opportunities to partner together in the future.
KeyCorp CEO Chris Gorman noted that the bank would explore opportunities across investment banking, wealth and payments leveraging Scotiabank's presence across Canada, Mexico and Central America and now in the U.S.
The deal will take place in two stages, with an initial investment for a 4.9% stake, followed by an additional 10%. After the closure of the deal in fiscal 2025, Scotiabank will become KeyCorp's largest investor, according to LSEG data.
KeyCorp said it would also look to reposition its available-for-sale securities portfolio to speed up its push for profitability, liquidity and capital improvements.
The U.S. banking industry is staring at the chances of tougher capital norms as regulators finalize the roll out of the so-called Basel III Endgame proposal.