(Reuters) - Scotiabank is buying a 14.9% stake in American regional lender KeyCorp ( KEY ) for $2.8 billion, as the Canadian bank taps into the stressed U.S. banking sector for growth outside its saturated home market.

KeyCorp ( KEY ) shares jumped 22% before the bell as Scotiabank priced the offer at $17.17 per share, a nearly 17.5% premium to KeyCorp's ( KEY ) last closing stock price. It will also be able to appoint two directors to KeyCorp's ( KEY ) board.

Smaller U.S. regional lenders have been struggling with higher cost of holding deposits and weak loan demand due to elevated borrowing costs.

Canadian lenders, meanwhile, have been looking for lucrative deals outside the country as growth slows in the domestic banking industry where the top six lenders control more than 90% of the market.

Last year, Scotiabank's rival Bank of Montreal ( BERZ ) closed the deal to buy BNP Paribas' U.S. unit - Bank of the West - for $16.3 billion, while TD acquired New York-based boutique investment bank Cowen for $1.3 billion.

"Leveraging Scotiabank's significant potential across Canada, Mexico and Central America and ours in the U.S., we will explore opportunities to work across investment banking, wealth and payments," KeyCorp ( KEY ) CEO Chris Gorman said.

The deal will take place in two stages, with an initial investment for 4.9% stake, followed by an additional 10%. After the closure of the deal in fiscal 2025, Scotiabank will become KeyCorp's ( KEY ) largest investor, according to LSEG data.

KeyCorp ( KEY ) said it would also look to reposition its available-for-sale securities portfolio to speed up its push for profitability, liquidity and capital improvements.

The U.S. banking industry is staring at the chances of tougher capital norms as regulators finalize the roll out of the so-called Basel III Endgame proposal.

The Cleveland, Ohio-based lender in July reported second-quarter profit that fell 5% and forecast a bigger drop in average loans in 2024. It had total assets of about $187 billion as of June 30. (This story has been refiled to add dropped word 'stake', in paragraph 1)

(Reporting by Manya Saini in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur)