As financial regulators around the world get set to boost capital requirements, banks everywhere are being forced to reassess the benefits of acquisitions.
A case in point is the potential purchase of Siam City Bank by Bank of Nova Scotia affiliate Thanachart Bank of Thailand.
According to CI Capital Market analyst Brad Smith, overnight reports out of the Southeast Asian country suggest the Thai central bank is on the brink of deciding whether to sell its 47.6% stake in Thanachart Bank, and the likely winner is the BNS affiliate, rumoured to be offering $984-million.
"The real issue here is not the impact of the SCIB acquisition but rather the relatively low level of BNS’s existing Tier 1 capital ratio," Mr. Smith said in a note to clients today.
If Thanachart Bank goes ahead with a previously announced $1.2-billion rights offering to fund the deal with Scotia subscribing to its share, the Canadian bank would end up with a lower Tier 1 capital ratio. BNS's Tier 1 ratio is currently 1.2% below the median level of its domestic peers of 12%, Mr. Smith said.
"Even when looked at from the proposed Basel III perspective the Common Tier 1 ratio after the SCIB funding would be around 6% compared to a median of 6.8% for the other Big Five banks.
Perhaps the simplest way to fix the problem would be an equity offering. Mr. Smith estimates Scotia would have to issue at least $2-billion of equity to bring its Tier 1 up to the same level as its peers, resulting in about dilution of about 5%.