As mergers and acquisitions heat up in the global banking sector, Bank of Nova Scotia has run into a problem that threatens to hinder its international growth strategy.
The cost of buying assets in Latin America and Asia, a favourite hunting ground for Scotiabank, is rising steadily as banks from around the world scour the globe for expansion opportunities.
Scotiabank, which made its name over the past five years by buying small banks in emerging markets - often before others got there - is now finding itself priced out of the market in some cases.
"We've been opportunistic and acquisitive over the last two years ... in Chile, Colombia and other countries in the region," Brian Porter, head of international banking at Scotiabank, said Tuesday at the Bloomberg Canada Economic Summit in Toronto.
"We'll continue to do that. Although, valuations are getting somewhat stretched in some countries."
In Chile, where Canada's third-largest bank purchased Banco Sudmaricano from Royal Bank of Scotland last year, the price of assets has escalated as other financial services firms recognize the country's stability and expanding economy.
"The long-term prospects for Chile are encouraging," Mr. Porter said. "But other people have found that marketplace too, and evaluations are getting stretched. So if you were to buy a bank in Chile today, you would be paying two-and-a-half, three-times book [value]"
That is above what Scotiabank has generally paid in the past as it built a reputation for investing early in emerging markets. It has holdings in Latin America that stretch from Mexico to Uruguay, Peru, Brazil and Colombia, among other countries. It also owns banking operations across Asia, including Thailand, Vietnam and Hong Kong.
Scotiabank wants to reach 10 per cent market share in Chile, but Mr. Porter noted that the company is a "disciplined purchaser" when it comes to price. The international expansion strategy has seen the bank make 22 acquisitions in Central America and Latin America, as well as the Asia-Pacific region, he said.
A reluctance to pay a steep price for the right to expand into new markets is also what will keep Canadian Imperial Bank of Commerce out of the U.S. retail banking market, the conference heard.
Richard Nesbitt, CIBC senior executive vice-president, said the returns on U.S. banking operations "aren't that attractive," suggesting his bank would be a long shot to buy a network of branches there, as its rivals have done.
Toronto-Dominion Bank and Bank of Montreal recently expanded their U.S. retail operations, while Royal Bank of Canada is considering whether it wants to sell its U.S. retail branches, or partner with a larger American bank.
In Canada, Mr. Porter said he doesn't see the topic of bank mergers coming back on the table any time soon. Although the federal Conservatives now have a majority, Mr. Porter said he doesn't think mergers will be a reality "in our lifetime." The strains put on the global banking sector amid the economic downturn, involving some of the world's largest banks in the United States, has likely hurt the political appetite for major consolidation in Canada, the conference heard.