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Fernando Morales

Bank of Nova Scotia is unlikely to take over CI Financial Corp. , and another bank, such as the Canadian Imperial Bank of Commerce , is arguably the best fit for the wealth management firm, CIBC analyst Paul Holden said.

"We have become less convinced that Scotiabank needs to - and therefore less convinced that it will - do this transaction," Mr. Holden wrote in a research report.

Investors have long speculated that Scotiabank would eventually buy CI in its entirety, but that changed after the bank's $2.3-billion purchase of DundeeWealth Inc. in November. The process of integration to wring out synergies should take several quarters, said Mr. Holden, who collaborated with CIBC bank analyst Rob Sedran on the report.

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The competitive advantage of Scotiabank, which owns 36 per cent of CI Financial, is its "well-developed international footprint," Mr. Holden said. "Devoting so much capital to the domestic wealth management space would necessarily limit its appetite for international acquisitions for a time… We believe international expansion appropriately remains the most important priority for this bank."

Most Canadian fund companies - including bank-owned fund companies - would benefit from a combination with CI because of its strong diversified fund offering and management team, he said.

"Given the importance of distribution and the bank's inherent advantages in that area through their vast branch networks, it is our opinion that if Scotiabank does not buy CI, it will ultimately be another Canadian bank that does."

CI Financial has a market capitalization of about $6.2-billion, which makes it too large a target for any independent Canadian fund company, other than IGM Financial Inc. , Mr. Holden wrote. But that is unlikely, because Power Financial Corp. , IGM's controlling shareholder, has a preference for U.S. expansion, does not provide CI Financial with the distribution it is seeking and "would not be a good cultural fit," he said.

Among Canada's big banks, an acquisition by CIBC appears to be the most compelling because it is domestically focused, has a strong balance sheet, strong distribution network, high return on equity, renewed emphasis on retail banking and wealth management and a "less-than-inspiring track record in U.S. expansion," Mr. Holden said.

The acquisition of CI Financial would be big for any bank, and particularly for CIBC, which is the smallest by market capitalization of the Big Five, he acknowledged. "It would be a big bite with negative near-term financial implications that would need to be tolerated."

But longer term, such a takeover would have a "favourable impact on business" and affect earnings growth positively and significantly, Mr. Holden wrote.

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Should Scotiabank decide to sell CI Financial and book a gain on a sale instead, "we would expect the shares (and capital ratios) to react positively," said Mr. Holden.

The fund company analyst rates CI Financial a "sector underperformer" because its stock price already includes a big premium compared with its domestic peers and that limits the upside potential.

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