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Scotiabank office sale would help capital shortfall

Bank of Nova Scotia's (BNS-T) planned sale of its Toronto headquarters will give Canada's No. 3 bank some breathing room on its capital levels, which are believed to lag its rivals and the country's regulatory expectations.

The bank said on Thursday it plans to put Scotia Plaza, an office complex that includes Canada's second-tallest office building, on the block in the hopes of capitalizing on Toronto's strong commercial real estate market.

The sale is expected to fetch as much as $1 billion. Scotia Plaza is a 2 million square-foot complex that consists of three integrated buildings, most notably a 68-storey postmodern office tower clad in red granite.

"In the current low-interest-rate environment, it's potentially a good time to sell," Scotiabank spokeswoman Ann DeRabbie said.

The headquarters of the country's "big five" banks are all located within a few blocks of each other in downtown Toronto, centered on the intersection of King and Bay Streets. Scotiabank is the only one of the lenders that still owns its own head office, as the others sold them to raise cash years ago.

CAPITAL CONCERNS

While the bank pointed to market conditions as a reason for the timing of the sale, analysts say the motive is likely more closely tied to the timing of tighter capital requirements that banks are facing around the globe

Under new Basel III requirements, banks must raise their Tier 1 common equity ratios to 7 percent by 2019. Canada's financial services regulator, however, would like the banks to be at that level by early 2013.

Most of the banks say they are already at or above that level, but Scotiabank is believed to be lagging the group.

National Bank Financial analyst Peter Routledge, pegs the Scotiabank's current level around 6 percent.

He says the bank could likely make up the shortfall using retained earnings over the coming year, but said the office sale would speed up the process.

"I'd look at the building sale within the context of capital; it's a bit of insurance for them," he said.

"If they can sell it for a billion, that's not a small number."

The added insurance would reduce the risk of having to raise equity or sell other assets core to the bank's strategy. It would also offset capital pressure from recent moves, such as Scotiabank's acquisition of a 51 percent interest in Colombia's Banco Colpatria, which closed on Wednesday.

Scotiabank paid just over a $1 billion for the lender, $500 million in cash and the rest in shares.

The bank has been aggressively adding to its Latin American presence in the wake of the financial crisis, and bank officials have said they plan to keep looking for opportunities.

Scotiabank Chief Executive Rick Waugh said last week the bank had the flexibility to pursue acquisitions, and was prepared to issue stock to do so, which limits the impact on capital levels.

John Aiken, an analyst at Barclays Capital, estimates the sale of the Scotia Plaza could add between 30 and 50 basis points to the bank's common equity ratio.

"Consummating the sale could go a long way in putting (the capital) issue behind it," he said in a note.

Toronto's commercial real estate market has remained strong despite economic concerns, helped by record low interest rates.

Office vacancy rates in the city fell by 70 basis points to 7.9 percent at the end of last year, according to a report by commercial real estate company Avison Young. The company forecasts the rate will decline to 7.2 percent in 2012.

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