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The Globe and Mail

Scotiabank building sale answers capital questions

The Bank of Nova Scotia's iconic red headquarters in downtown Toronto, the 68-storey Scotia Plaza.

Fred Lum/The Globe and Mail/Fred Lum/The Globe and Mail

Shares of Bank of Nova Scotia jumped Thursday morning and analysts lauded the bank after the Globe and Mail broke the story that the company is looking at selling its headquarters tower to raise capital.

The market is happy because a sale could alleviate the need for the bank to raise money in more painful ways, such as a stock sale that dilutes current shareholders or divesting a strategic asset like a stake in a foreign bank.

The bank tower could fetch $1-billion, some real estate sources told the Globe. Considering that a sale of a stake in the nearby, but smaller, Canada Trust tower in 2008 valued that building at $850-million, that's not a crazy number. Market interest rates are lower now and the world is further from the financial crisis.

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A sale that big would create a substantial gain for Scotia, and that gain would go straight to its capital buffers.

That answers a key question for the bank: How is it going to meet Basel III capital targets by year end without diluting shareholders with an equity raise or having to sell strategic assets like its stake in asset manager CI Financial ? The bank has always stressed it had options. But most analysts had forgotten about the tower as an asset that could be sold.

"People took that to mean common equity, selling other businesses, like the ownership in CI," said Canaccord Genuity analyst Mario Mendonca. "But I don't think anyone was thinking that that included selling Scotia tower."

Just as it provides an answer to one question, the idea of a sale raises another. How much would a sale raise Scotia's capital ratio?

Scotia has never disclosed the carrying value of the building, so it's impossible to calculate how big a gain the bank would take on a sale. Nor is it clear exactly what tax rate to apply.

Still, analysts are taking their best shot.

John Aiken of Barclays Capital called the sale plan a "creative and brilliant move to help boost Scotia's capital ratios, without having to alter its core strategic assets, or issuing common equity."

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He estimated that a sale could drive BNS's Basel III common equity ratio, which needs to get to 7 per cent, higher by 30 to 50 basis points. "Consummating the sale could go a long way in putting this issue behind it," Mr. Aiken wrote in a note to clients.

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