Scotiabank buys into Canadian Tire Financial Services (incl. Canadian Tire Bank) | Canadian Tire | Discussion forum

Canadian Tire Corporation has announced yesterday, the sale of a 20% equity stake in its Canadian Tire Financial Services Ltd arm, which is that division that wholly owns the Canadian Tire Bank Schedule I Chartered Bank subsidiary that offers GICs and non-registered/registered (TFSA only) high-interest savings accounts, to be effective on or before Sept. 30th, 2014, to The Bank of Nova Scotia (Scotiabank). That's happening rather quickly, actually, perhaps more quickly than I'd anticipated.

As one of their stated goals was to reduce the funding liability, and thereby the capital they're required to hold on their balance sheet that can be used in more shareholder-friendly ways (i.e., stock buybacks, dividend increases and possibly retail acquisitions), Canadian Tire has also struck an agreement with Scotiabank to fund a minimum of $2.25 billion in credit card receivables. Presumably, that will be "off balance sheet," either through Scotia's own credit card receivables trust or through its own deposit operations. Either way, considering that's almost exactly half CTFS' existing outstanding credit card receivables of approximately $4.4 billion, that either funds all of their future credit card growth and/or allows them reduce the credit card receivables within its own Glacier Credit Card Trust. It also, in my view, reduces the importance on its own direct-to-consumer and deposit broker-channeled GIC & HISA operations of Canadian Tire Bank such that I still see them lowering the interest rates to equal to or below Scotiabank's own deposit rates and/or exiting this space entirely. Credit card receivable securitization may offer less "spread" but, in terms of funding certainty and less capital outflows/slower capital inflows in the form of deposits, it's much more preferred. In short, they can raise capital very quickly (inside of a month) and, because of the structure, certainty through long-term purchases and then they pay either monthly or semi-annually distributions to unitholders.

Among other deal "highlights":

• New customers who join the Scotiabank Start Right Program (targeted to new immigrants, either temporary- or permanent-residents), which provides new Canadians with a bank account, credit card and other financial services, will receive $50 at Canadian Tire and $50 at Mark's to help them buy every day essentials for life in Canada
• Through Canadian Tire, Scotiabank will offer $500 in Canadian Tire Money to any Canadian Tire Options MasterCard holders who switch or take a new five-year mortgage from Scotiabank
• The CTFS MasterCard portfolio is the 8th largest in Canada (presumably, after #1 ranked TDCT, which owns CUETS Financial, #2 ranked CIBC, #3 ranked Scotiabank, #4 ranked RBC, #5 ranked BMO, #6 ranked Capital One, #7 ranked National Bank of Canada and ahead of small players like Home Trust, ATB Financial and HSBC rounding out the top 10, I'm guessing)
• As well, Canadian Tire Corporation has the option to sell an additional 29% of CTFS (and, through CTFS, Canadian Tire Bank) to Scotiabank within 10 years, giving Scotiabank a 49% stake in CTFS/CTB. Scotiabank also has the right to sell back to Canadian Tire its existing 20% equity stake in 10 years if the deal is not financially and strategically (i.e., they can't successfully acquire new customers and/or isn't financially beneficial) within the same timescale. Given Scotiabank's existing track record of successfully cross-selling multiple Scotiabank products to over 50% of new mortgage customers originated through its mortgage broker channel, coupled with the fact CTFS is already materially profitable and, once Scotiabank owns 49% of it and CTB, should add between $80 and $100 million (assuming zero percent annual growth rate, which of course it won't be - it'll be much higher), as well as the likelihood of additional strategic actions, I think both Canadian Tire and Scotiabank will choose to exercise that option
• Purchase price (for 20% equity stake) is $500 million, valuing the CTFS/CTB division at $2.5 billion (or slightly higher than analysts' estimated $2 billion) and only $500-600 million less than Scotiabank paid for all of ING DIRECT Canada (now Tangerine) so this is a major deal

Now, for my own analysis. I'm a bit surprised Canadian Tire appears to have gotten what they were looking - the option to retain majority control of CTFS. CTFS provides 30% of CTC (Canadian Tire Corporation) net income currently. Selling up to 49% to Scotiabank will reduce that, obviously, but conversely, they're also giving up more than half (potentially all, depending on how the deal is structured) of the funding liability. As well, assuming they sell the additional 29% to Scotiabank, CTFS/CTB essentially becomes an "equal partners" joint venture and, as such, both parties can now cross-sell and market to each other's customer directly, bypassing any National Do Not Call List (which exempts existing customers of a company from adhering to the List). Given that CTFS sold its mortgage and line of credit book a number of years ago to National Bank of Canada, there a host of potential opportunities for Scotiabank in that they can now market, directly in-store or through telephone/e-mail CTC and CTFS customers. Similarly, CTC benefits from new immigrants coming to Canada, which increasingly attracted to Scotiabank versus HSBC (which is in decline) becoming regular retail store customers. As well, potentially we could see other banking products (such as Tangerine) promoted by way of unstaffed "kiosks" (or third-party in-store marketers/merchandisers signing up new banking customers) and even full-service or cash-dispensing Scotiabank ABMs within Canadian Tire stores (in much the same way CIBC has with Loblaw through its PC Financial partnership). Such a move could vault Scotiabank into #1 position, ahead of RBC, in terms of number of ABM locations.

Bottom line: While I am sure there was lots of interest from the major banks, I think Scotiabank won this deal for giving Canadian Tire what it wanted, to retain a substantial contributor to its own bottom line and to reduce its funding liability. That said, because it did so, what you could (and I think likely will) see happen in the coming months to first two years of this "strategic partnership", is Canadian Tire Bank selling its GIC and HISA customers to Scotiabank in much the same way RBC Royal Bank assumed the Ally Canada deposit customers from ResMor Trust Company.

To those looking to consolidate (i.e., close down) some of their existing "virtual" bank accounts, your Canadian Tire Bank accounts would be where I'd start. I see Canadian Tire and Scotiabank promoting Scotiabank and, potentially, Tangerine banking & savings offerings (since Scotiabank is becoming primary funder of the CTFS MasterCard portfolio). I just hope it happens sooner rather than later so we can remove CTB from the "comparison chart".

While it happened differently than I expected, my prediction ultimately came true (and I'll try and give you my 2014 banking predictions later) and I have to say, Scotiabank is really cleaning up in terms of acquisitions of what are, fundamentally, new customer acquisition channels. Think of CTFS as very similar to its joint venture SCENE membership program with Cineplex and you'll truly "get" it.

Cheers,
Doug