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Scotiabank conserves cash, changes terms of CI Financial deal


Bank of Nova Scotia is changing the way it will pay for its $2.3-billion stake in mutual fund firm CI Financial Income Fund in order to boost its capital levels.

Scotiabank announced back in early October that it would pay $2.3-billion in cash to insurer Sun Life Financial Inc. to pick up its 37-per-cent stake in CI Financial. Yesterday, Scotiabank announced that it plans to close that deal next week, but it will only hand over $1.55-billion in cash. The remainder of the purchase price will be paid for with $500-million worth of common shares and $250-million in preferred shares.

By preserving cash, the bank will bolster its capital levels, keeping more of a financial cushion that buffers it from unforeseen events.

The move "enables us to keep some capital available for future initiatives," said Scotiabank spokesman Frank Switzer.

"What the deal does is add $750-million to Scotiabank's regulatory capital, improving the bank's ratios," Dundee Securities analyst John Aiken wrote in a note to clients.

"This will alleviate some of the concerns surrounding the bank's capitalization that arose out of its quarterly earnings released yesterday [Tuesday] and should remove one of the pressures on its valuation."

Scotiabank announced a 67-per-cent drop in fourth-quarter profit Tuesday, after being hit by a $642-million after-tax writedown. On a conference call with analysts that day, vice-chairman Sabi Marwah suggested the bank could issue preferred shares to further boost its capital.

"We have lots of room, so don't assume that we are not going to take action on that front," he said. Canada's banking regulator recently changed the capital rules to allow banks to count a greater proportion of preferred shares.

While Scotiabank might still issue more preferred shares, there is no longer a sense of immediacy when it comes to shoring up its capital, Mr. Aiken said.

National Bank Financial analyst Robert Sedran said Scotiabank's Tier 1 capital ratio, the key measure that regulator's watch, had been expected to dip to 8.8 per cent if the deal for the stake in CI had been all cash. With the changes, it will now be about 9.1 per cent, he said. Regulators require the ratio, which is a measure of a bank's capital against its assets weighted by the risk they pose, to stay above 7 per cent.

Scotiabank said it will issue $500-million in common shares to Sun Life at $34.60 a share, and $250-million in 6.25 per cent rate reset preferred shares.

The $34.60 equity price is almost 7 per cent higher than Tuesday's closing price, Mr. Aiken noted.

Scotiabank is purchasing the stake in CI Financial, which is the country's No. 3 mutual fund company by assets under management, to bolster its Canadian wealth management operations, which are a key priority for the bank.

CI Financial chief executive officer Bill Holland said in an interview yesterday that, now that it's official the deal will close next week, he expects that his company will be sitting down with Scotiabank executives in the coming weeks to talk about business issues.

Bank of Nova Scotia (BNS)

Close: $33.50, up $1.12

© 2007 The Globe and Mail. All rights reserved.

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