Bank of Nova Scotia is betting on the market for no-frills, high-interest banking with a proposed C$3.13 billion ($3.16 billion) purchase of the Canadian unit of ING Groep NV in its biggest acquisition.
Canada’s third-largest bank agreed late yesterday to acquire ING Direct, spending C$1.9 billion after deducting excess capital at the unit and selling C$1.51 billion in Scotiabank stock. The cash purchase will add C$30 billion in deposits, the bank said in a statement.
Scotiabank and its competitors face a slowdown in domestic consumer banking next year on concern fewer Canadians will use credit and buy homes. ING Direct, led by Chief Executive Officer Peter Aceto, has built a base of 1.8 million customers by offering alternative products to customers such as high-interest savings accounts.
ING identified a niche that’s growing, said Anatol von Hahn, head of Canadian banking at Scotiabank. “It’s a simple, strong, good, no-frills direct channel,” Von Hahn said in an interview at the bank’s Toronto headquarters yesterday. “They became the eighth-largest bank in Canada in 15 years. That’s pretty awesome.”
The transaction comes a day after Scotiabank, along with smaller competitor Bank of Montreal, unexpectedly boosted quarterly dividends while reporting fiscal third-quarter results that topped analysts’ estimates. Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce followed suit today, raising dividends after beating earnings expectations.
“While expensive in our view, we admit that BNS will improve its funding base with the deal, which is extremely important,” Brian Klock, an analyst at Keefe, Bruyette & Woods, said in a note to investors.
ING Direct, which employs 1,100 people, will continue to operate as a separate unit of Scotiabank and market itself as a no-frills alternative to larger lenders, Von Hahn said. Scotiabank expects to retain all of ING’s clients while expanding the platform in Canada, the bank said yesterday.
The acquisition puts Scotiabank “within striking distance” of Royal Bank of Canada and Toronto-Dominion Bank, the county’s two biggest lenders by deposits, Von Hahn said. Scotiabank will go from about 10.5 percent market share on retail deposits to 13 percent, he said.
Toronto-Dominion has 14.4 percent deposit market share while Royal Bank of Canada has 13.6 percent, according to Scotiabank.
“The acquisition is quite significant,” said Michael Smedley, who helps oversee about C$1 billion at Morgan Meighen & Associates in Toronto. “It’s a very aggressive move by Scotia on the domestic front, where they tend to be regarded as middle-of-the-road in the domestic banking business.”
Canada’s banking system, ranked the world’s soundest by the World Economic Forum, avoided many of the writedowns taken by global competitors during the financial crisis and didn’t receive any government bailouts.
“It goes to show again that the Canadian market remains a very attractive financial services market,” said Anil Tahiliani, head of North American equities at Calgary-based McLean & Partners Wealth Management Ltd., which owns Bank of Nova Scotia shares among about C$1 billion in assets. “As a BNS shareholder this is a long-term positive,” Tahiliani said by phone.
North American banks including Scotiabank are taking advantage of Europe’s turmoil to buy operations and assets from competitors on the continent that need to raise cash. Under pressure from regulators, ING is reviewing which units to sell as plans to repay a government bailout this year becomes less certain.
ING, the biggest Dutch financial-services firm, received 10 billion euros of state aid in 2008. Following its bailout, the Amsterdam-based bank was ordered by the European Union to sell its insurance operations, its U.S. online bank and Dutch mortgage lender WestlandUtrecht Bank before the end of 2013.
Scotiabank’s strategy is built on organic growth rather than acquisition, Von Hahn said. “If, along the way, opportunities present themselves and they fit in our strategy, then we will take a look at it,” he said.
Scotiabank was in acquisition talks with ING for about four months, he said.
ING is in discussions with buyers for its Asian life insurance operations and may sell the business in parts to generate higher proceeds, Chief Executive Officer Jan Hommen said earlier this month. ING has so far repaid 7 billion euros of aid as well as 2 billion euros in interest and premiums.
Hommen sold the company’s U.S. online bank to Capital One Financial Corp. for about $9 billion in February, and disposed of the Latin American insurance operations last year. The firm has also divested a real estate investment-management business and car-lease unit.
The Canadian transaction is expected to lead to a 1.1 billion-euro gain after tax, Amsterdam-based ING said in a statement. The sale, releasing 1.4 billion euros in capital, should boost ING’s core Tier 1 ratio by 47 basis points, to about 11.6 percent if applied to the ratio as of June 30, ING said.
The deal, expected to close in December, would be the biggest bank takeover in North America this year after PNC Financial Services Group Inc. bought Royal Bank of Canada’s U.S. unit for $3.5 billion in March, according to data compiled by Bloomberg. M&T Bank Corp. agreed to buy Hudson City Bancorp for about $3.7 billion in a transaction expected to close in the second quarter of 2013.
Scotiabank closed little changed at C$52.30 in Toronto and has risen 2.9 percent this year.
The takeover is the biggest bank deal in Canada since Toronto-Dominion bought CT Financial Services for C$8 billion in 1999, Bloomberg data show.
ING started its Internet bank in Canada, its first branchless venture, in 1997. It built the division through a television advertising campaign in which Dutch actor Frederik de Groot urged Canadians to “Save your money” in accented English and French and criticized fees charged to the nation’s established banks.