Mexico is ‘biggest single opportunity’ as Scotiabank expands global reach

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Investors have been associating Bank of Nova Scotia with troubled emerging markets and a weak domestic economy, but the Canadian lender is countering with a different association: Mexico.

During the first part of its international banking investor day, held in Mexico City, Scotiabank highlighted the country's large economy, close proximity to the United States and relatively under-banked population as a reason to feel upbeat about its prospects – and, by extension, Scotiabank's.

"In terms of pure potential, Mexico represents the biggest single opportunity for us," said Dieter Jentsch, group head of international banking, noting in particular the goal of expanding its reach into credit cards.

Scotiabank has been trying to clarify its approach to emerging markets after its slumping share price lagged Canadian big-bank peers for two years in a row. Instead, it has emphasized its operations in the four-country Pacific Alliance, consisting of Mexico, Colombia, Peru and Chile, whose economies are competitive, relatively open and less susceptible to the commodities downturn than many of their emerging-market peers.

"After a long history of banking internationally, we know we're investing in the right Latin American markets. We want to be defined by the countries in which we've chosen to bank," Mr. Jentsch said.

He declared that the bank's profit from the region, which topped $1-billion in 2015, should rise between 9 per cent to 11 per cent annually over the next three to five years, without resorting to acquisitions. That's a slower growth rate than the previous five years, but nonetheless is between 2.5- and 3.5-times economic growth.

Clearly, strong economic performance explains only part of the enthusiasm for the region.

Scotiabank also believes it can attract more customers to the bank, given that the region has 169-million young people who don't have bank accounts. It also believes it can drive more efficiency from the region by increasing its use of technology and modernizing branches, translating to as much as $60-million in additional profit over the next three to five years.

Streamlining operations – for example, by merging 14 data centres into two – should save $300-million in costs within five years, including the $130-million that has already been cut.

Executives said the cuts shouldn't generate additional restructuring charges, following a year in which sector-wide charges among Canadian banks topped $1-billion.

But while Scotiabank sees strong growth within the Pacific Alliance, Mexico holds a particular attraction.

Brian Porter, Scotiabank's chief executive officer, said he expects further consolidation within the country's banking sector, opening up the potential for acquisitions.

There is also an opportunity to add more customers, given that just 39 per cent of Mexicans age 15 and up have a bank account, versus 63 per cent of Chileans and 99 per cent of Canadians.

Scotiabank expects it can increase the number of affluent Mexican customers by 19 per cent annually over the next three to five years, and mass-market customers by 13 per cent annually.

Scotiabank also plans to carve out a greater share of the credit-card market. Not only do credit cards drive higher profit margins when the economy is performing well, they also tend to bring customers closer to the bank, driving up cross-selling opportunities.

"For us, achieving scale is not a matter of expanding our branch network or installing more ATMs," said Enrique Zorrilla, head of Scotiabank Mexico. "We are gaining relevance by growing our customer base and deepening our existing customer relationships."

Editor's note: A previous version of this story said Scotiabank should save $300-million in costs within five years, on top of the $130-million that has already been cut. In Fact, the $300-million includes $130-million in previous cuts.