Bank of Nova Scotia signalled that it will take a breather from major acquisitions, after racking up deals totalling nearly $7-billion over the past year.
Chief executive Brian Porter said the focal point in 2019 will be on merging these purchases into the bank’s existing operation instead of seeking out new acquisitions. At the same time, Scotiabank continues to prune divisions that it considers “non-core,” or those that are not crucial to its future, disclosing Tuesday that it’s selling its banking operations in nine Caribbean countries as well as its life insurance businesses in Jamaica and Trinidad.
“This year is going to be focused on integration,” Mr. Porter said on a conference call. “We’re not in the business of acquiring anything this year.”
Mr. Porter has been refining the bank’s business mix since he took over five years ago and has exited, or announced a plan to exit, 22 businesses or geographic markets in that time. Mr. Porter told investors to expect more divestitures in the next year, though he did not provide specific targets. Analysts expect Scotiabank to sell its 49-per-cent stake in Thailand’s Thanachart Bank, something that has long been rumoured.
The bank’s move to slow down on acquisitions follows some investor concern about the pace of deals and the bank’s ability to generate good returns on them. Over the past 12 months, Scotiabank has announced three sizable acquisitions, the largest of which was the majority stake in Banco Bilbao Vizcaya Argentaria S.A.'s retail banking business in Chile, for a cost of $2.9-billion. Other notable deals included snapping up money managers MD Financial Management and Jarislowsky Fraser Ltd., two separate acquisitions that cost the bank a total of more than $3.5-billion.
Individually, each deal was in line with business goals that Scotiabank had previously spelled out. Collectively, however, they made investors pause. Concerns about Scotiabank’s ability to extract good acquisition returns, coupled with some fears about economic weakness in emerging markets and some tremors from North American free-trade negotiations, have weighed on Scotiabank’s share price, which has overshadowed the bank’s solid earnings growth of 10 per cent in the past 12 months, after adjusting for one-time costs incurred in 2018.
Since Nov. 1, 2017, which was the start of the previous fiscal year, Scotiabank’s shares have dropped about 15 per cent. The average performance of the five other large Canadian banks over the same period is a drop of about 2 per cent.
“After having deployed $7-billion on acquisitions over the past year, Scotiabank has (rightfully) shifted its strategic focus to integration and execution," National Bank Financial analyst Gabriel Dechaine wrote in a research note. “While we normally view this type of commentary as predictable, in Scotiabank’s case, execution on M&A [mergers and acquisitions] integration is of utmost importance.”
While some investors have been down on the bank, the lender’s profit continues to climb, particularly in Canadian banking, which contributes 50 per cent of total earnings. Despite a recent slowdown in housing sales, Scotiabank’s average mortgage portfolio grew 3 per cent year-over-year, and the lender expects residential mortgages to continue growing at around 4 per cent next year.
Projected interest rate hikes by the Bank of Canada are also likely to boost profits, because banks will be able to issue loans at higher yields. Meanwhile, the deposits that fund these loans take longer to re-price to higher rates, boosting their lending margins. Scotiabank expects total profit from Canadian banking to climb 7 per cent or higher in 2019.
Earnings also jumped in the international banking unit, which is now dominated by Latin America – and particularly by what Scotiabank calls the “Pacific Alliance” countries of Chile, Colombia, Peru and Mexico. The division’s total profit climbed 17 per cent in 2018, after adjusting for one-time items. While this surge was boosted by the recent BBVA Chile acquisition, even after stripping this addition out, profit still jumped 15 per cent.
The news Tuesday that Scotiabank is exiting nine small Caribbean countries and selling the operations to Republic Bank comes as much of the region struggles to deliver consistent economic growth – a problem that has also affected Royal Bank of Canada and Canadian Imperial Bank of Commerce. RBC recently sold its Jamaican operations, and earlier this year CIBC tried to sell off some of its FirstCaribbean bank by taking it public in the United States, but ultimately had to pull the deal.
“Due to increasing regulatory complexity and the need for continued investment in technology to support our regulatory requirements, we made the decision to focus the bank’s efforts on those markets with significant scale in which we can make the greatest difference for our customers,” Scotiabank said in a statement.