Scotiabank looks to ‘monetize’ stake in CI Financial

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Bank of Nova Scotia is looking to sell its substantial stake in Canada's largest independent wealth manager, a bold move that will reshape the country's investment landscape.

Scotiabank owns 37 per cent of CI Financial Corp., a position now worth $3.8-billion. The country's third-largest lender intends to "monetize" the stake at a time when wealth managers are in heavy demand and the S&P/TSX composite index nears a record high. Since the start of 2013, CI's stock has climbed 44 per cent and the company now has $97-billion worth of assets under management.

While the move may seem at odds with Scotiabank's recent emphasis on wealth management – an activity that now accounts for roughly 20 per cent of its earnings, up from 3 per cent a decade ago – management said it can sustain the growth with its own assets, especially after buying the 80 per cent of wealth manager DundeeWealth that it did not already own for $2.3-billion in 2011.

"With the strong momentum in our wealth management along with the continued success of our investment in Dundee, we are quite confident that we have a solid wealth management platform," vice-chairman and chief operating officer Sabi Marwah said.

Canadian banks and insurers have been hungry for wealth management assets – Canadian Imperial Bank of Commerce is in the running to buy Russell Investments and insurers such as Sun Life have devoted more and more resources to asset management – but the CI position can't fall into the hands of a single buyer.

Under the terms of an agreement between the two parties, Scotiabank cannot sell more than 20 per cent of CI to one purchaser. For that reason, the position could either be split up among multiple strategic parties, or could be sold directly to investors through a public offering.

Scotiabank has tapped its own bankers, as well as advisers from Goldman Sachs & Co., to determine the bank's best course of action. Mr. Marwah said a final decision has not been made.

However, CI chairman Bill Holland said he was under the initial impression that Scotiabank is leaning toward selling the stake directly to investors. When Scotiabank told him about its plans last week, on the same day that CI released its quarterly earnings, the asset manager was shocked. At the time, Mr. Holland told the bank that he couldn't see how it could be done.

"This is a crippling decision they made," he added in an interview.

If Scotiabank decides to sell its stake straight to investors, there is a chance that CI's shares will start to fall on the assumption that the offering would be at a discount to the market price. And if Scotiabank can't sell its entire stake in one go, the remaining position could lose a lot of value over time. Canaccord Genuity analyst Scott Chan said CI's fundamentals remain strong, but the uncertainty and selling will weigh on CI's stock.

The relationship between CI and Scotiabank has been a complicated one, which ultimately led to a war of words between Mr. Holland and former Scotiabank CEO Rick Waugh. After Scotiabank withheld its votes for the two top executives at CI when they were seeking election to the CI board in 2011, Mr. Holland called the move "truly idiotic" and "mean-spirited and petty."

Mr. Waugh retired last October, and there were questions as to how new CEO Brian Porter felt about the position. Initially bank executives made it seem as though they were content with CI, but new rules from Canada's banking regulator have affected their thinking. Because CI is a minority investment, the bank must hold an extra amount of capital against its position in the firm. "That certainly played into the decision, but wasn't the only factor," Mr. Marwah said.