Scotiabank gets Fed approval to be KeyCorp’s largest shareholder

The Bank of Nova Scotia received approval from the Federal Reserve on Thursday to increase its ownership stake in KeyCorp to up to 14.9%.

The approval comes four months after Toronto-based Scotiabank made an initial $800 million investment in Key, taking ownership of 4.9% of the regional bank. Key, based in Cleveland, has said previously that it used some of the added capital to restructure its bond portfolio.

Scotiabank, the third-largest Canadian bank by assets, is expected to invest another $2 billion into Key, which would make it the largest shareholder in the $189.8 billion-asset company.

In the Fed’s order approving the acquisition of additional common shares, the central bank said its review of Scotiabank’s request “does not appear” to show that the Canadian bank would control KeyCorp or its banking arm, KeyBank.

It was not known as of Thursday evening when Scotiabank, which has a limited presence in the United States, plans to make the second investment or what Key plans to do with the proceeds. But it may involve more tweaks to the balance sheet.

Speaking at an industry conference earlier this week, Key Chairman and CEO Chris Gorman said, “The second piece of restructuring … will be contingent on getting approval” from the Fed and what comes afterward would be “based on market conditions and what’s out there and what there is to be done.”

“We’re in a position where we can do none of it, all of it or some permutation,” Gorman said.

A spokesperson for Key declined to comment. Scotiabank representatives did not immediately respond to requests for more information.

The Fed’s approval of Scotiabank’s investment came earlier than expected. It was projected to be received during the first quarter of 2025, the banks said when the deal was announced in August.

Gorman said the two banks “haven’t really partnered much” to date because they’ve been awaiting the thumbs-up from the Fed. But “I think there’s incredible opportunities,” he said.

Analysts have described Scotiabank’s investment in Key as a cautious expansion in the United States, where it has a sizable corporate presence but doesn’t directly touch consumers.

By contrast, Toronto-Dominion Bank, the Bank of Montreal and the Royal Bank of Canada all have U.S. branch footprints.

Key is hardly the only bank to implement a balance-sheet repositioning strategy in recent months, as yields have ticked up following the sharp increase in interest rates during 2022 and 2023.

Last week, Associated Banc-Corp said it plans to sell a $2 billion block of low-yielding mortgage loans and securities, freeing up balance-sheet space for more valuable assets.

Union Bankshares in Morrisville, Vermont, and Columbia Financial in Fair Lawn, New Jersey, have announced similar plans.

The banks all plan to post aftertax losses in the short term and aim to recover growth in the longer term.