Scotiabank  has signed a deal to buy a 20 per cent stake in Canadian Tire's financial services business for $500 million in cash as part of a strategic partnership between the companies.

For consumers, the deal is likely to lead to cross promotions between Scotiabank and Canadian Tire products, with the bank beginning by offering $500 in Canadian Tire Money to any Canadian Tire MasterCard holder who signs up for a new five-year mortgage from Scotiabank.

In another new offer it will give Canadian Tire and Mark's Work Wearhouse gift cards for those who sign up for the bank's Start Right program for newcomers to the country. 

Scotiabank also becomes the exclusive partner for new financial products for Canadian Tire customers and  will provide up to $2.25 billion in credit card receivable financing for Canadian Tire's financial services business.

Scotiabank president and chief executive Brian Porter said the deal is part of the bank's ongoing strategy to grow its high-margin credit card business and acquire new customers.

Building customer loyalty

"We're in the business of acquiring new customers every day and that's where the we think the value of this transaction is," Porter said.

Both companies see potential for building customer loyalty with joint projects. Scotiabank also has an option to buy up to  29 per cent of Canadian Tire's financial services business within the next 10 years at the then fair market value.​

Robin Hibberd, executive vice-president of retail products and services for Canadian banking at Scotiabank, said the deal will allow the bank to work strategically with Canadian Tire in terms of attracting new customers and providing new offers to existing ones.

Canadian Tire's financial services division, which includes credit cards, has $4.4 billion in receivables and 1.8 million active customer accounts.

Barclays Capital analyst John Aiken called the deal "intriguing" but noted it would have a modest impact on Scotiabank's bottom line in the short term.

"The deal demonstrates Scotia's willingness to increase its exposure to the Canadian retail landscape as well as its ability to be flexible and creative in attaining these goals," Aiken wrote in a note to clients.

Strong Canadian Tire brand

"Combining with a strong brand such as Canadian Tire in terms of marketing and taking a stake in CT's financial services business does provide longer term upside, but we do not anticipate much movement on near term earnings expectations from the street."

The deal with the bank came as Canadian Tire reported its first-quarter results and increased its dividend.

The retailer said it will now pay a quarterly dividend of 50 cents per share, up from 43.75 cents per share.

Canadian Tire said it earned a profit attributable to shareholders of $70.6 million or 88 cents per share for the quarter ended March 29, compared with $73 million or 90 cents per share a year ago.

Retail sales for the company totalled $2.46 billion, up from $2.43 billion in the first three months of 2013.

Same-store sales were down 0.5 per cent at its Canadian Tire stores, while both its Mark's stores and FGL Sports, which includes Hockey Experts, Sports Experts, National Sports, Intersport, Pro Hockey Life and Atmosphere, saw increase.

FGL Sports same-store sales were up 6.4 per cent, while Mark's gained 2.9 per cent.

With files from CBC