Federal approval granted to Scotiabank for expanding its stake in KeyBank
Scotiabank Approved to Invest in KeyBank: A Significant Cross-Border Partnership
In a landmark decision, the Federal Reserve has given its approval for Scotiabank to invest up to 14.99% in KeyBank, a major U.S. regional bank. This strategic minority investment, worth approximately $2.8 billion, marks a significant milestone in cross-border banking partnerships.
The approval paves the way for Scotiabank to become a substantial minority shareholder in KeyBank, enabling closer collaboration between the two banks in areas such as risk management, capital markets, and banking operations. This strategic partnership could allow Scotiabank to leverage KeyBank's U.S. footprint to expand its presence and services in the American market.
KeyBank, on the other hand, stands to benefit from the investment by gaining access to additional capital and strategic support from a large Canadian bank. This partnership could underpin growth initiatives, particularly in middle-market and commercial banking where KeyBank is seeing strong momentum.
Unlike recent U.S. expansion attempts by other Canadian banks, Scotiabank's approach through a strategic minority investment offers a more cautious and flexible model. Instead of a full acquisition or merger, this investment allows influence and collaboration without full operational control or immediate consolidation.
The regulatory context suggests that this approval could signal accelerating bank M&A activity in the U.S., with improving approvals and clearer regulatory pathways. Scotiabank's investment in KeyBank could be an important foothold or a prelude to deeper cooperation or expansion.
It's worth noting that Scotiabank does not control a U.S. commercial bank, and the two banks do not compete directly in any retail market. Scotiabank will also be able to nominate two directors to KeyBank's board following the approval.
The Justice Department found no significantly adverse effect on competition from the investment, as stated in the Fed's order. KeyBank CEO Chris Gorman spoke about the investment at the annual Goldman Sachs financial services conference.
This investment differs from other Canadian banks' recent U.S. expansion attempts, which often involve mergers or full acquisitions of U.S. banks or financial entities. Scotiabank's approach through a strategic minority investment offers a differentiated model of U.S. market entry.
In other banking news, the Federal Reserve has approved Scotiabank's application to acquire up to 14.99% of Cleveland-based KeyBank. However, TD's proposed $13.4 billion acquisition of First Horizon was derailed in 2023, with TD's U.S. retail assets capped at $434 billion, stunting the bank's earlier announced plans to open 150 branches in the southeastern U.S. by 2027.
Meanwhile, Scotiabank infused $2.95 billion into its U.S. subsidiary, City National, in 2023 to boost its capital. BMO boosted its U.S. presence through a $16.3 billion acquisition of BNP Paribas' former U.S. retail arm, Bank of the West, in 2022.
However, TD agreed to pay over $3 billion in penalties after a multiagency investigation on suspicion that millions of dollars tied to the illicit drug fentanyl funneled through the bank. City National was fined $65 million by the Office of the Comptroller of the Currency and mandated to improve its strategic plan and compliance risk management.
This investment by Scotiabank in KeyBank represents a low-risk, low-cost optionality in North America with strong returns, according to Reuters. Scotiabank's $2 billion phase 2 of its $2.8 billion investment in KeyBank can now proceed.
In summary, the Fed's approval of Scotiabank's investment in KeyBank legitimizes and enables a significant cross-border minority investment, fostering cooperative growth and offering a differentiated model of U.S. market entry compared to full acquisitions pursued by other Canadian banks.
- The strategic minority investment by Scotiabank in KeyBank could facilitate collaborative growth in areas such as risk management, capital markets, and banking operations, providing an opportunity for both parties to enhance their business and financial pursuits in the industry.
- With the approval of Scotiabank's investment in KeyBank, the banking-and-insurance sector may witness a rise in cross-border partnerships, as this could set a precedent for fewer adverse competition effects and clearer regulatory pathways for potential investors.
