Bank of Nova Scotia’s recent move to take a stake in Canadian Tire Financial Services should prove to be a financial and strategic positive for the bank, Fitch Ratings suggests in a new report.

The rating agency says that, while it doesn’t expect any ratings implications from the deal, it believes the transaction is “modestly positive” for Scotiabank (TSX:BNS). Fitch notes that the deal will be immediately accretive to the bank’s earnings, and only modestly dilutive to its capital. And, it expects that Scotia “should be able to relatively quickly re-build capital through retained earnings.”

Scotia is buying a 20% stake in Canadian Tire Financial Services, which is the eighth largest credit card issuer in Canada, for $500 million. The deal also includes a provision that would allow the bank to take its ownership interest up to 49%, if that option is exercised.

Additionally, the firms will have marketing agreements in place for potential cross-selling, Fitch says; and, it notes that Scotia will provide CTFS with a $2.0 billion credit back stop for its credit card receivable securitizations.

Fitch says that the marketing agreement is favourable to Scotia as it will enable the bank, over time, to sell mortgage, home equity, and wealth management products to the Canadian Tire customer base.

“The transaction may help Scotiabank continue to expand its mortgage balances at a time when Fitch believes the mortgage market in Canada is likely to slow,” it says.” However, to the extent that it significantly boosts Scotiabank’s mortgage portfolio, the impact could be negative since Fitch believes there is some evidence of over-valuation in the Canadian housing market.”

It also notes that the deal gives Scotiabank a competitive boost by giving it a larger interest in a credit card originator. “Given the current changes in the Canadian credit card market from the split of the large Aeroplan portfolio between CIBC and TD, the increased originator interests could help Scotiabank’s competitive positioning in Canada,” it says.

Finally, the rating agency suggests that Scotia may eventually want to increase its ownership stake, “particularly if the bank decides to place receivables, such as those generated by CTFS, on its balance sheet.”