Bank of Nova Scotia is cashing in on the deal-making opportunities arising from the U.S. mortgage turmoil, picking up online brokerage E*Trade Canada for $444-million.
The deal becomes the biggest part of the turnaround plan that New York-based E*Trade Financial Corp. announced in January, after it dangled dangerously close to bankruptcy over worries about mortgage loan losses.
With this deal, E*Trade, which originally aimed to raise $500-million (U.S.) by selling non-core assets, will have raised more than $700-million this year.
In return for the cash, Scotiabank's Canadian wealth management business, which has become a key priority for the bank, will receive a major boost. The transaction will double the size of Scotiabank's presence in the direct investing sector while adding 125,000 active accounts.
"This is truly a unique opportunity to acquire the last significant independent player in the direct investing market in Canada, and one with an exceptionally strong platform," Scotiabank chief executive Rick Waugh said on a conference call yesterday.
Seeking to expand its wealth management operations, Scotiabank bought TradeFreedom Securities Inc., a Canadian online brokerage boutique, last year, and more recently acquired Dundee Bank and a stake in DundeeWealth.
"Direct investing is an important and growing segment in Canada, even much more so in Canada than other markets," Mr. Waugh said yesterday. "We see this acquisition as a unique opportunity to immediately become a leader in this very attractive market."
The deal is expected to make Scotiabank the second-largest brokerage in the industry based on number of accounts, and third largest in assets.
E*Trade Canada has roughly $4.7-billion (Canadian) in assets under administration and 190 employees. Scotiabank executives said they recognize that E*Trade's pricing strategy is key to its success.
"Online brokerage is playing an increasingly significant role in wealth management as more Canadians are using online investing solutions, and many are becoming more active traders," said Chris Hodgson, head of domestic personal banking at Scotiabank. "This is a growing market," he added, noting that it has a compound annual growth rate of 15 per cent over the past five years and assets under administration are expected to double over the next eight years.
Scotiabank also hopes this deal will prompt some E*Trade customers to open bank accounts so they can easily transfer money between accounts. The bank will also pitch products, like mortgages, to E*Trade customers online.
In an interview, E*Trade Canada president Duncan Hannay said the deal represents a great opportunity for E*Trade Financial to free up more than $500-million (U.S.) of capital to move forward.
The Canadian brokerage business has been shopped around for a number of months, and "I think it's fair to say that we had a very robust process, there was lots of interest in the business," he said.
Like its competitors, revenue growth at E*Trade Canada's operations has been stung this year by the market environment.
One analyst called the deal reasonable but expensive, noting it's one of the last books of business left to buy. However, he added that it's safe to say Scotiabank is benefiting from having been more patient than some of its peers to take advantage of the troubles in the U.S. financial sector. For example, TD's $8.5-billion acquisition of New Jersey-based Commerce Bancorp in March would have been significantly cheaper had the bank waited.
Analysts said the $444-million (Canadian) E*Trade purchase would not prevent Scotiabank from making another acquisition, such as a U.S. regional bank. This spring, the bank took a look at National City Corp., a troubled Cleveland-based bank that would have cost billions. However, executives at the bank have recently downplayed the idea of any imminent foray into U.S. retail banking.
The acquisition of E*Trade is expected to close in September or October, following regulatory approvals.
BANK OF NOVA SCOTIA (BNS)
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