DBRS has confirmed its ratings on Bank of Nova Scotia following the announcement of its $3.1-billion acquisition of ING Bank of Canada.
The rating agency says that it views the transaction as being consistent with Scotia’s strategy to grow its personal-deposit market share, and it says it will also improve the bank’s funding profile.
“ING’s over-riding strength is its retail deposit gathering capabilities using non-branch channels (mainly Internet, telephone and mobile banking), thereby allowing attractive pricing as costs are kept low,” says DBRS, noting that it is the eighth-largest bank in Canada as measured by deposits, with $30 billion outstanding, of which 95% is retail (at June 30).
Whereas, Scotiabank is more dependent on wholesale funding than the average of its Canadian bank peers, it says. “The acquisition positions the bank for increased funding diversification; improved funding costs, as this retail funding will replace more expensive wholesale funding; and solidifies [Scotia’s] number three deposit market share,” it says.
DBRS says that the transaction is expected to be accretive to earnings in the first 12 months following the close, and will have a modest impact on Scotia’s Tier 1 common equity capital ratio. The rating agency expects that its capital ratio will be in the 7% to 7.5% range after the deal. Scotia is paying $3.1 billion in cash for ING, of which $1.5 billion will be from a bought deal offering of 29 million Scotia common shares, and $1.2 billion from surplus capital at ING, it notes.
Moreover, DBRS says that the integration risks associated with the deal are “somewhat diminished as Scotiabank intends to run ING as a stand-alone bank under a separate brand”; noting that the ING brand will be maintained under a licensing agreement for up to 18 months following the closing (expected by December, subject to regulatory approvals).