Is Bank of Nova Scotia Interested in National City?

Reports that the Bank of Nova Scotia (BNS) has joined private equity players in the bidding for a stake in troubled Cleveland-based lender National City Corp. (NCC) may come as little to surprise to some, since the Canadian bank may be in a more secure position for a major acquisition than some of its U.S. rivals that have been hit by the credit crisis.

Scotiabank is also the most international of Canada’s banks, so it may be trying to establish a retail and commercial banking presence in the U.S. like its domestic rivals.

National City, with a market cap of roughly $5.5-billion, has demonstrated several distress signals related to the U.S. housing and subprime mortgage slump, said Desjardins Securities analyst Michael Goldberg. It also cut its most recent quarterly dividend by 49% and on April 1 announced that Goldman Sachs (GS) had been hired as an advisor to review strategic alternatives.

But if Scotiabank is considering an investment in National City, Mr. Goldberg thinks it would be an opportunistic move, not a strategic one like its investment in Japan’s Shinsei Bank because the risks are too unclear and the franchise is mediocre. National City looks like it needs an injection of capital, much like lender Washington Mutual Inc. (WM), which raised $7-billion this week after its subprime loan losses drained its capital.

Scotiabank also has risk management expertise that could be valuable to National City, Mr. Goldberg said in a note to clients, adding that both of these roles could prove very lucrative to the Canadian bank.

In a time when the market is very nervous about retail banking in the U.S., such a move would be a major strategy shift. But Jason Bilodeau, analyst at TD Newcrest, said he is giving management the benefit of the doubt given its strong track record and ability to “scrub the books” on acquisitions. He called National City an “interesting” asset for Scotiabank to start with given its challenging balance sheet and loan book.

So while investors may be skeptical about a deal, “strategically it makes sense to us to buy assets when others are weakened and looking to sell,” the analyst said in a note, adding that Scotiabank has an estimated C$4 to C$5-billion of excess capital on hand. However, given the current environment, it may want to maintain a solid cushion.

Mr. Bilodeau also thinks other Canadian banks will become more active in buying U.S. retail assets as prices come down, with Bank of Montreal (BMO) and Royal Bank (RY) expected to lead the way.

Comments

[Voice ofReason]

National City is in play for either an outright buy or major capital infussion before it's scheduled 4/22 quarter reporting. Rarely does such a large bank stumble as badly in so short a time as NCC has this past year. This stock has been beaten far below it's book value and could be a steal for a larger fish and Scotiabank could be that shark or white knight depending on how things unfold.

Also don't count out Key Corp, Wells Fargo or Fifth Third. In fact while it may be a dark horse J. P. Morgan in spite of being busy swallowing Bears, easily has enough reserves to take on NCC as a second helping. My rational for JPM being interested is last year's takeover of MAFB, a Chicago area bank with a lot of prime locations. Chase also has a lot of Chicago area shops, some even right next store to what now are NCC locations so they could realize huge cost cutting savings and big up lots of deposits.