Canadian Tire buys back stake in financial-services arm from Bank of Nova Scotia for $895-million

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Canadian Tire Corp. Ltd. CTC-T has bought back a minority stake in its financial services division from Bank of Nova Scotia BNS-T, restoring full ownership of the credit-card business in an all-cash $895-million deal.

Scotiabank bought a 20-per-cent stake in Canadian Tire Financial Services in 2014 for $500-million. Scotiabank is selling the stake as it works to cut costs as part of a broader strategic overhaul under the new leadership of chief executive officer Scott Thomson.

In a press release announcing the deal on Tuesday, the Toronto-based retailer also said it will “evaluate strategic alternatives” for the financial services arm in 2024, hiring Goldman Sachs to advise Canadian Tire on “the optimal ownership structure” for the business.

The deal was reached as consumers tighten their wallets under the pressure of high interest rates, while banks set aside more provisions for loans that could default and reduce their work forces in an attempt to cool rising expenses.

Expanding Canadian Tire’s Triangle Rewards loyalty program – including 2.3 million holders of Triangle-branded credit cards – is a major focus of the growth strategy, dubbed Better Connected, that the retailer launched last year. The four-year, $3.4-billion investment plan includes a goal to boost the number of purchases made by loyalty members at its stores and online, and to build the program so that Canadian Tire can deliver more personalized ads to customers based on their shopping patterns.

Like other retailers that issue store-branded credit cards, Canadian Tire encourages customers to “stack” their loyalty memberships by using its credit cards to earn more points at its stores. Those cards represent roughly three-quarters of all Canadian Tire Money issued to members annually, even though credit cardholders account for roughly 21 per cent of Triangle’s 11 million active loyalty members.

While the financial services segment makes up less than 10 per cent of Canadian Tire’s annual revenue, it is a contributor to profit: in fiscal 2022, financial services accounted for 28.7 per cent of the company’s income before taxes.

The business has expanded in recent years, with credit-card receivables growing more than 60 per cent since 2014, according to Canadian Tire. The retailer says it is the seventh-largest issuer of credit cards in Canada by receivables outstanding. In its most recent quarter, the three months ended July 1, Canadian Tire’s gross average accounts receivable totaled nearly $7.1-billion.

Taking back full control of that business will give Canadian Tire “much greater control and flexibility in building out our loyalty program,” CEO Greg Hicks said in a statement on Tuesday.

Canadian Tire will record a charge related to the transaction of $328-million or $5.88 a share in its third-quarter financial results, which the company will report next week.

Scotiabank said in a press release that it will post an after-tax gain of approximately $319-million in its fourth-quarter earnings, and that the sale will bolster its common equity tier 1 ratio, or CET1 – a measure of a lender’s ability to absorb losses – by about 16 basis points. (A basis point is one-hundredth of a percentage point.) It will continue to provide a committed credit facility of $1.1-billion to Canadian Tire Financial Services for the next 18 months.

While Scotiabank’s turnaround plan will not be unveiled until December, the lender has already started culling expenses.

In mid-October, Scotiabank said it is cutting 3 per cent of its global work force, adding to a string of job reductions on Bay Street this year. It also said that it is consolidating its real estate footprint, and that it wrote down the value of its 18-per cent-investment in China-based Bank of Xi’an Co. Ltd.

The bank said at the time it expects the $590-million in charges to affect its fourth-quarter earnings per share by about 49 cents and its CET1 ratio by approximately 10 basis points. But it expects to book the cost savings from these cuts by 2025.

Royal Bank of Canada analyst Darko Mihelic said he views this “transaction as another small step in the right direction.” He said that the gain from selling its stake in the retailer’s financial services unit will partly offset the charges announced a few weeks ago.

“We do not believe that a 20-per-cent stake in CTFS was critical to [Scotiabank’s] long-term strategy,” Mr. Mihelic said in a note to clients.

In the release on Tuesday, Canadian Tire’s Mr. Hicks noted that loyalty programs have “evolved” since the 2014 deal with Scotiabank. That includes Scotiabank’s move to expand its own loyalty program, Scene+, which has grown from a partnership with Cineplex Inc. to add more retail partners – including Sobeys parent company, grocery retailer Empire Co. Ltd., which became a co-owner of the program last year.

“Accelerating issuance of eCTM [Canadian Tire Money], including through opportunities with new partners such as Petro-Canada, is key to driving value for members in a rapidly evolving loyalty marketplace,” Mr. Hicks said in the statement.

Shares of Canadian Tire closed down 1.91 per cent on the Toronto Stock Exchange.