Scotiabank shifts capital to North American operations from Latin America

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Bank of Nova Scotia BNS-T is shifting more money to its North American businesses, where it believes it has bigger opportunities for growth than in its Latin American operations.

Ten months into his tenure as chief executive officer, Scott Thomson unveiled his new strategic plan on Wednesday to revive the bank’s beleaguered share price, aimed at reallocating capital, building its book of deposits and reviving employee morale. The new CEO made his first major appeal to shareholders at the bank’s investor day as he attempts to capture the confidence of Bay Street to bolster the lender’s stock.

Over the next few years, the bank will deploy 90 per cent of its capital – up from 70 per cent in 2023 – to its key businesses in Canada, the United States and Mexico, where it believes it will benefit from the $1.6-trillion in annual trade between the three countries, as well as the Caribbean.

“The return profile of the international bank has not been commensurate with the risk and it’s been a drag on overall returns,” Mr. Thomson told reporters during a media roundtable. “Committing to allocating more capital to that North American corridor and asking our international bank to optimize their capital is a meaningful shift.”

Scotiabank plans to increase the amount of capital it pours into its Canadian banking division by 50 per cent in a bid to balance a loan portfolio that’s heavy on mortgages and auto lending with a larger deposit book to ease its high funding costs. It expects to grow its personal and commercial deposits by $200-billion over the next five years.

In fiscal 2023, ended Oct. 31, deposits rose 9 per cent across Scotiabank’s business, driven by its Canadian and international banking divisions.

Banks fund loans using the money that customers deposit into products such as chequing and savings accounts, as well as wholesale funding from larger investors – which has become more expensive as central banks have hiked interest rates. Core deposits provide a cheaper source of funding and bolster customer loyalty, which Scotiabank hopes will boost its profits.

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The bank also pegged British Columbia and Quebec as markets in which it believes it has an opportunity to grow its customer base. And it plans to attract more deposits through improved digital platforms and products and its online, low-fee bank, Tangerine.

But growth in Canada is constrained by a saturated banking market, and expanding Scotiabank’s business means taking clients from competitors.

The threat of an economic downturn and the higher cost of borrowing has dampened loan demand and prompted customers to move cash into higher-interest savings accounts, which cost banks more money to fund. The challenging operating environment is affecting earnings at all banks, as they grapple with rising costs and potential loan defaults.

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“We recognize it’s a game of inches, but if we keep that consistency, you’re going to see results,” Mr. Thomson told investors. “This year was a good first step. It becomes harder from here, I agree with that. But when you have that north star and everyone is focused and mobilized on it, I think we’ll make results.”

Through its new plan, Scotiabank said that it will grow earnings per share by 5 per cent to 7 per cent by 2025, driven by its Canadian banking and global wealth management units. A key dynamic of the strategy relies on increasing referrals between its businesses across Canada, the U.S. and Mexico to draw more of its customers’ financial portfolios to the bank.

Investors have waited more than a year for a glimpse at the new Scotiabank CEO’s strategy. It has had the worst performing share price over the past five years of Canada’s Big Six banks. Its beleaguered stock has continued to flounder this year as paltry earnings disappointed shareholders while the threat of a recession and a stricter regulatory regime has dragged on bank stocks broadly. Inside the bank, employees have anxiously awaited updated marching orders from their new boss after years of bruised morale.

Mr. Thomson has been slashing costs over the past few months by cutting jobs, divesting from stakes in financial services partnerships and reducing the bank’s real estate footprint.

Most Canadian lenders have expanded into the U.S. over the years, while Scotiabank placed its biggest bet on Latin America. But over the past decade, it sold off some businesses in the region to focus on a group it refers to as the Pacific Alliance: Mexico, Colombia, Peru and Chile.

In its international banking division, analysts expect Scotiabank to exit some countries and reallocate capital to others where it expects significant growth, including fast-expanding Mexico.

Scotiabank plans to turn around its weaker operations in Colombia and Central America, or exit those markets entirely, the bank said Wednesday in an investor presentation. Colombia posted a negative return on equity – an industry metric that measures profitability – in the fourth quarter, while Central America posted the second-lowest profitability in Scotiabank’s Latin American unit.

“Let me be clear: If we don’t see a path to improvement, we will redeploy that capital as fast as we can,” head of international banking Francisco Aristeguieta told investors. “But we have to give these plans a chance.”

The bank will also moderate the amount of money it invests in its Chilean and Peruvian personal and commercial units, as well as its capital markets businesses across the region, excluding Mexico.

In the U.S., where Scotiabank already generates 10 per cent of its earnings, its capital markets and wealth banking businesses will allow the bank to cross-sell products and services to customers across its priority markets, especially in Mexico.

Last year, Scotiabank made the rare move of appointing a board member as its new CEO. Mr. Thomson, who joined the board in 2016, left 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.

This year, Mr. Thomson hired veteran bankers to join his executive team, and brought on some leaders from competitors to oversee the strategic turnaround and bolster the lender’s succession bench.

”It would be a failure on my part if I did not have the next CEO come from within the ranks,” Mr. Thomson said.

Editor’s note: A previous version of this article incorrectly stated the value of annual trade between Canada, the United States and Mexico. It is $1.6-trillion. This version has been updated.