UPDATE 2-Scotiabank to buy stake in Canadian Tire financial unit

Thu May 8, 2014 2:55pm EDT

(Recasts with Scotiabank cards focus, analyst comment)

TORONTO May 8 (Reuters) - Bank of Nova Scotia is buying 20 percent of Canadian Tire Corp Ltd's financial services business for C$500 million ($459 million) in a move to boost the bank's market share in credit cards and get access to more customers.

The bank, Canada's No. 3 lender, will also supply up to C$2.25 billion in credit card receivable financing to Canadian Tire's unit, it said on Thursday.

Brian Porter, who took over as Scotiabank's chief executive officer last year, said in April the bank would push for "meaningful" growth in its credit card business over the next few years.

"Canadian Tire is an iconic company with an incredibly strong brand and great customer focus," he said in a statement, adding that the deal would give the bank an opportunity to increase its customer base.

As part of the arrangement, which is expected to close in September, Canadian Tire has the option to sell up to another 29 percent of the business to Scotiabank within 10 years.

The retailer, which operates about 1,700 sporting goods and hardware retail and gasoline outlets, said last year it was looking for a partner for its credit card portfolio.

Canadian Tire's financial services division contributed about 10 percent of Canadian Tire's first-quarter revenue and is the eighth-largest credit card issuer in Canada, with 1.8 million active customer accounts and annual spending volume of C$12 billion.

Scotiabank will fund the acquisition with cash.

The move comes amid a struggle for credit card market share among Canada's banks as a slowing housing market has prompted them to look for other avenues to drive lending growth.

Robert Sedran, an analyst at CIBC World Markets, said while the transaction was financially immaterial for the bank, it was "strategically interesting."

"This is a noteworthy transaction that furthers this bank's reach into the domestic financial services business and allows it to deploy a little more capital in Canada and find another way to attract customers to the bank," he said in a note.

Canadian Tire announced the agreement as it reported a 3.3 percent drop in first-quarter net profit attributable to shareholders. It also said it will boost its dividend by 14 percent.

Shares of Canadian Tire were up 0.5 percent at C$108.44 on the Toronto Stock Exchange, while Scotiabank was up 14 Canadian cents at C$66.70. ($1 = 1.0903 Canadian dollars) (Reporting by Cameron French in Toronto; Additional reporting by Ashutosh Pandey and Shubhankar Chakravorty in Bangalore; Editing by Don Sebastian and Jeffrey Benkoe)