CHICAGO--(BUSINESS WIRE)--Fitch Ratings does not expect any rating implications for Bank of Nova Scotia (Scotiabank, 'AA-/F1+') from its recently announced transaction with Canadian Tire. Scotia is purchasing a 20% minority interest in Canadian Tire Financial Services (CTFS), the eighth largest credit card issuer in Canada, for $500 million (CAD).
As part of the transaction, Scotiabank and CTFS will have marketing agreements in place for potential cross-selling and Scotiabank will also provide CTFS a $2.0 billion credit back stop for its credit card receivable securitizations. Canadian Tire will also have a 10-year put option to Scotiabank, which could take Scotiabank's ownership interest up to 49%, if exercised.
Fitch believes the transaction is modestly positive for Scotiabank, as it will be immediately earnings accretive and only modestly capital dilutive at closing, and Scotiabank should be able to relatively quickly re-build capital through retained earnings. Additionally, the marketing agreement is also favorable to Scotiabank as it will be able over time to sell primarily mortgage and home equity and also wealth management products to CTFS customer base.
The transaction may help Scotiabank continue to expand its mortgage balances at a time when Fitch believes the mortgage market in Canada is likely to slow. However, to the extent that it significantly boosts Scotiabank's mortgage portfolio, the impact could be negative since Fitch believes there is some evidence of over-valuation in the Canadian housing market.
Scotiabank may eventually want to increase its ownership in CTFS, particularly if the bank decides to place receivables, such as those generated by CTFS, on its balance sheet.
The transaction also gives Scotiabank a larger interest in a credit card originator. Given the current changes in the Canadian credit card market from the split of the large Aeroplan portfolio between CIBC and TD, the increased originator interests could help Scotiabank's competitive positioning in Canada.
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