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The Scotiabank offices in the commercial district of San Isidro in Lima, Peru on April 11, 2015.Enrique Castro-Mendivil/Reuters

In his first remarks to investors as the new head of Bank of Nova Scotia BNS-T, newly minted chief executive officer Scott Thomson zeroed in on the lender’s beleaguered international business. The risks of operating in its Latin American markets have outweighed the returns in recent years, and one of his first acts as CEO would be to rejig the international division, he said during a conference call in February.

With the bank gearing up to unveil its strategic turnaround plan in December – less than a year into Mr. Thomson’s tenure – investors expect a spotlight on the division, and analysts say it could exit some countries entirely and reallocate capital to others where it expects significant growth, including booming Mexico.

Constrained by Canada’s highly-saturated banking sector, the country’s largest lenders have turned to global markets – largely the United States – in search of greater growth. But Scotiabank went further afield, hinging its international expansion strategy on Latin America generally, and a group it refers to as the Pacific Alliance: Mexico, Colombia, Peru and Chile.

Mexico – where Scotiabank is a top-five lender in terms of market share and where it generates more than a third of its revenue from Pacific Alliance countries – is considered to be one of the bank’s best growth opportunities. Speaking to shareholders in recent months, Mr. Thomson has said he plans to target industries that benefit from Mexico’s export agreements – especially with the U.S. – by growing Scotiabank’s commercial banking and wealth management businesses in the country.

“I see the most connectivity with Mexico. And you think about the trade flows between Canada and the U.S., U.S. and Mexico and that whole NAFTA region,” Mr. Thomson said during a conference hosted by Scotiabank in September. “Is there connectivity between Peru, Chile and Colombia? There’s actually some, around those specific alliance companies. We actually do a lot of business with multi-Latino companies, and there’s an opportunity with multinational companies, but definitely not as much as the Mexico-U.S.-Canada corridor.”

Scotiabank declined to comment for this story in advance of releasing its new strategic plan.

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Mr. Thomson has already started culling costs in other areas of the bank, cutting jobs, divesting from stakes in financial services partnerships and letting go of some of its real estate. The moves come as Canada’s largest lenders broadly face rising expenses, climbing loan loss provisions and mounting regulatory capital requirements, which are putting pressure on profits amid concerns of an economic slowdown.

Operating across Latin America poses logistical challenges. Businesses in the region are disparate, which forces Scotiabank to navigate varying regulations, tax policies and political climates. Investors expect the strategic plan to demonstrate how the bank will bring its wealth management and commercial and retail banking services together in the countries with the most growth potential, while making some cuts so it can reallocate those resources to other expansion opportunities.

While some of Scotiabank’s Latin America businesses are posting strong profits, others are consistently missing the bar, Barclays analyst John Aiken said.

“The one that sticks out is Colombia. Its profitability has not been nearly as strong as the other three [Pacific Alliance countries], and I think that puts it in the running to be seriously considered for disposal,” he said. Mr. Aiken also pointed to Scotiabank’s operations in the Dominican Republic and some countries in Central America.

Last year, Scotiabank stunned Bay Street by appointing a board member as its new CEO. Mr. Thomson, who joined the board in 2016, made the move into banking from his role as the head of construction equipment dealer Finning International Inc., a major provider of Caterpillar equipment in Latin America, particularly to the copper mining industry in Chile.

His predecessor, Brian Porter, trimmed the lender’s international operations to reduce its exposure to riskier markets and focus on the Pacific Alliance countries where he thought Scotiabank could grow its market share and compete with local rivals. During his tenure, the bank bought and sold businesses in Latin America to build its wealth management unit and exit higher-risk countries.

Scotiabank’s history in the region stretches back more than a century. It first entered the Caribbean in 1889 when it opened a branch in Kingston, Jamaica. It later expanded into Central and South America when it opened locations in Belize and Argentina in the 1960s – two markets it has since exited.

While the bank has left certain countries, it has added capacity in markets where it thought it could dominate. In 2017, Scotiabank opened four digital innovation hubs in its Pacific Alliance countries, with offices in Colombia, Mexico, Peru and Chile, as well as a fifth in Toronto. A year later, Scotiabank acquired a large stake in BBVA Chile, doubling its operations in the country and creating the third-largest private bank in Chile.

When Mr. Porter took the reins in 2013, Scotiabank operated in more than 50 countries. Today, it has businesses in fewer than 30, with a focus on its core four markets in Latin America, which contributed more than a third of Scotiabank’s revenue in the recent quarter. It also still operates in several Caribbean countries, Brazil, Panama, Costa Rica and the Dominican Republic – a group that includes some of the bank’s least profitable markets.

“The prior decisions were probably good risk decisions that have allowed them to retain what would have been additive, but I think you will see further pruning,” Bank of Montreal analyst Sohrab Movahedi said in an interview. “I wouldn’t expect them to tell us that they are urgently looking to further tighten their footprint in the Pacific Alliance and the Latin American region, but I would expect they’ll give us a sense of what it would look like to get it done over there.”

The lender may also redeploy capital from regions where Scotiabank’s operations are more focused on the higher-risk retail banking segment, including Panama and Costa Rica, to other areas that offer greater commercial banking opportunities, according to Mr. Movahedi.

The bank’s share price has lagged its peers in Canada over the past decade, as inconsistent financial results in its Latin American businesses weighed on sentiment.

“When international has done well, Scotia traded at a premium because it was seen to have a very good outlet for growth, because you can only grow so much in Canada where the market is very saturated,” Keefe, Bruyette & Woods analyst Mike Rizvanovic said in an interview. “If your growth outlet is not performing well, then that’s a potential headwind for a bank versus its peers.”

Mr. Thomson is looking to reverse that trend. Earlier this year, he launched a bank-wide “refresh” to address investor concerns, and the unveiling will be a defining moment for Mr. Thomson as he looks to turn the corner on his first year at the helm of the bank.

The lender’s first significant leadership change under Mr. Thomson’s watch came in its Latin American division. Ignacio (Nacho) Deschamps, then head of international banking, left the bank in the spring, ushering in new hire Francisco Aristeguieta, who was previously the executive vice-president and CEO of Boston-based bank State Street Corp.’s institutional services unit.

Mr. Aristeguieta is no stranger to international markets. He spent 25 years at New York-based Citigroup Inc., where he led its businesses in the Latin America and Asia Pacific regions.

Scotiabank’s operations in Colombia have struggled the most in the Pacific Alliance in recent years. Its return on equity – a key industry metric that measures profitability – in the third quarter was negative 0.7 per cent, far below Mexico at 25 per cent, Peru at 15 per cent and Chile at 9.7 per cent.

Mr. Thomson said during a conference call in May that the bank is working to “improve the performance of Colombia, recognizing that the current performance is not acceptable.”

Chile and Colombia also booked the largest increases in provisions for credit losses (the funds banks set aside for loans that could default), largely in unsecured retail debt, as the countries’ economies slow.

“We expect key macroeconomic indicators in Chile and Colombia to remain challenged in the near term, owing to a lagged impact of higher interest rates and the loss of purchasing power associated with high inflation,” Scotiabank chief risk officer Phil Thomas said during a call with analysts in August.

But some of the bank’s least profitable international markets are expected to see the most growth next year. Scotia Economics estimates that in 2024, the Colombian and Chilean economies will grow the fastest of the lender’s major markets.

The challenge of operating in the region is that Latin American markets are vastly different and difficult to predict. Interest rates are significantly higher than Canada in the region, and they swing depending on the decisions of each country’s central bank. While inflation has started to cool and investors expect borrowing costs to decline, heated rates have a long way to fall. In Colombia, Mexico and Chile, central bank rates have climbed to 13.25 per cent, 11.25 per cent and 9 per cent, respectively, towering over Canada’s 5 per cent.

The banking culture in Latin America is also different from Canada’s. People in some countries tend to distrust the banks, opting instead to keep their money hidden rather than in chequing and savings accounts. Delinquency rates on loans tend to be high, and are rising as interest rates spike – a trend that has played out at Scotiabank, particularly in Chile and Colombia. As a result, banking in Latin America is a riskier business than it is in Canada.

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Each country has its own political hurdles as well, boosting uncertainty for businesses – and especially a multinational bank. Chile – where the bank inked a $1.3-billion deal last year to increase its stake in Scotiabank Chile – is in the throes of rewriting its constitution. Peru, which has long been referred to as the next country to grow to the scale of Mexico in the region, undergoes frequent government turnover.

Brendan McKenna, international economist at Wells Fargo, said that “Peru becoming the next Mexico has certainly been a topic of discussion for a long time,” but its political instability poses too great of a risk for companies looking to grow there, despite its strong precious metals industry and economy.

“If they can figure out the politics – and that’s a big if – but if they can figure out the politics, Peru could actually become the next Mexico, where fundamentals are really strong, the politics can be somewhat stable, and you don’t see a lot of volatility in financial markets,” Mr. McKenna said in an interview. “And that could enhance Peru’s growth potential over the longer term.”

But a still-developing banking sector across Latin America means there is ample room to grow. Scotiabank’s home market in Canada is already highly saturated and competitive, dominated by the Big Six banks. As more people across Latin America adopt digital financial platforms, interest in banking services is growing.

The Pacific Alliance countries are leading Scotiabank’s digital adoption. Digital sales of banking products in its international division have jumped 43 per cent since 2019, compared with a 3.5-per-cent increase in Canada.

“What makes the region compelling is the higher growth, the underbanked relative to higher GDP per capita countries, and also the lack of concentration in the banking systems,” Mr. Aiken said. “If done successfully, all these make for a very compelling proposition for Scotia.”

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