Scotiabank Demonstrates The Importance of Forecasting & Timing
The November 2023 edition of Finance 'In-Action,' will look at Retained Earnings, Extraordinary Items and Management Decision-Making through Scotiabank’s sale of its stake in the Canadian Tire Financial Services Unit.
”Scotiabank will record an after-tax gain of about $319 million in its fiscal fourth quarter, and the sale would boost its Common Equity Tier 1 (CET1)1 ratio by roughly 16 basis points”.
Calculation of the CET1 includes Retained Earnings. Retained Earnings represent the cumulative profits the company has earned after dividends have been paid.
“The deal comes about 2 weeks after Scotiabank announced it would take a fourth-quarter charge of $590 million. The Canadian Tire transaction will counter (offset) those charges… and help Scotiabank achieve a 13% CET1 ratio in the fourth quarter” (compared to the 11.5% requirement set by the Office of the Superintendent of Financial Institutions (OSFI).
Management’s decision to sell its stake in Canadian Tire is well-timed since the proceeds from the sale, the $647 million gain help to reduce the impact of the $590 million expense related to 3% staff reductions and a write-down of its investment in a Chinese bank.
Scotiabank Sells Stake in Canadian Tire Unit for $647 Million, Bloomberg, October 31, 2023.
1. Common Equity Tier 1 (CET1) is a component of Tier 1 capital that is primarily common stock held by a bank or other financial institution. It was a measure introduced in 2014 as a precautionary way to protect the economy from a financial crisis. CET1 comprises a bank’s core capital and includes common shares, stock surpluses, retained earnings, common shares issued by subsidiaries and held by third parties, and accumulated other comprehensive income (AOCI). Common Equity Tier 1 (CET1) Definition and Calculation, Investopedia, Mitchell Grant, 2013.
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