By Nivedita Balu and Granth Vanaik
(Reuters) -Bank of Nova Scotia is raising C$895 million ($647 million) in cash by selling back its 20% stake in the financial services unit of retailer Canadian Tire, helping the lender bolster capital as the economy is on the brink of recession.
The move underscores how Canadian lenders are preparing for tougher economic times in a higher for longer interest rate environment by shedding non-core assets to bolster their balance sheets.
Scotiabank's move follows that of Peer Bank of Montreal which is reportedly looking to exit the recreational vehicle lending segment after it said it was winding down its indirect auto lending business.
Canadian Tire said it would evaluate strategic alternatives for Canadian Tire Financial Services (CTFS), which will be undertaken with Goldman Sachs as the company's financial adviser during 2024.
Bank of Nova Scotia had bought the stake in CTFS for C$500 million in 2014 as it looked to boost its share in the credit cards market and get access to more customers.
"Concluding this partnership (with Scotiabank) will give us much greater control and flexibility in building out our loyalty program," said Canadian Tire CEO Greg Hicks.
Scotiabank said the deal would benefit its CET1 ratio, a key gauge of a bank's financial strength, by about 16 basis points.
The bank, Canada's fourth largest, cut 3% of its workforce earlier this month, which it had said would be a 10 basis points hit to its CET1 ratio.
"This transaction provides more capital relief than the charges previously announced and will likely help Scotiabank achieve a 13% CET 1 ratio for Q4," RBC Capital Markets analyst Darko Mihelic said, adding that the CTFS stake was not critical to Scotiabank's long-term strategy.
The bank is expected to lay out a fresh strategy at its December investor day, the first such event after CEO Scott Thomson took charge in February.
Scotiabank said it will continue to provide a credit facility of C$1.1 billion to CTFS for the next 18 months.
Analysts at S&P Global Ratings said Canadian Tire will benefit from full ownership of CTFS but will likely incur higher debt costs to finance the transaction.
Canadian Tire said it will record a charge of C$328 million related to the transaction, amounting to C$5.88 per share, which will be reflected in its third-quarter 2023 results.
Shares of Canadian Tire were down 2.5% while those of Scotiabank edged lower.
($1 = 1.3830 Canadian dollars)