Rick Waugh is that rare breed of CEO with no desire to pull off a big deal.
Scoop up a major rival that's in distress and transform Bank of Nova Scotia into a much bigger player, or vault it into new markets? No thanks, not for him.
"I call it discipline," he told analysts on a conference call yesterday.
It's a strategy that doesn't make the headlines, or a big impact on the bank's year-over-year profit growth, he acknowledged. But acquisitions are like a treadmill, and "I would rather take it a little slower on the treadmill."
These days, the chief executive officer of Canada's most international bank is doing a lot of his walking at home.
When the subprime mortgage crisis began hammering the value of U.S. financial institutions, Mr. Waugh was one of the first executives to go shopping. He took a close look at Cleveland-based lender National City Corp. in early 2008. But he had trouble coming to terms with the unknowns on U.S. banks' balance sheets, and once the government started injecting equity into the banks, he lost his appetite to do a deal there.
So he focused on his top priority in Canada - building up a substantial wealth-management business. Compared to some other countries Scotiabank is in, where even basic financial products such as consumer loans are relatively new, opportunities for growth in Canada are few and far between. Having conquered the lending business here long ago, banks have been turning their sights to wealth management and insurance in an effort to retain control of baby boomers' retirement savings and cash in on them to the full extent possible.
With that in mind, Scotiabank has made a number of deals in recent years, including the acquisition of TradeFreedom Securities Inc., Dundee Corp.'s bank and a stake in its wealth-management operations, a chunk of CI Financial Corp., and all of E*Trade Canada. While each was notable, none were large enough to radically change the bank.
The acquisition spree petered out this year, and some opportunities went to its rivals. Just this month, Manulife Financial Corp. managed to scoop up AIC Ltd.'s mutual fund business for a song.
Chris Hodgson, the head of Scotiabank's Canadian operations, said it's true that good opportunities are still popping up in the wealth management space. But the bank is now "more than comfortable" that it can boost profits in the next few years with what it has already got.
Indeed, its acquisitions aren't contributing all that much to its earnings growth yet. And it is plowing additional money into people, technology and new products such as a flex-GIC (a guaranteed investment certificate that can be redeemed prior to maturity) to squeeze more growth from the business.
Importantly, it is also putting muscle into building a significant insurance business this year, and is now pitching a full lineup of home, auto and life insurance products. That's a significant new growth avenue for the bank, which lagged a couple of its rivals in this respect.
In the hunt for growth in the basic banking and deposit business - the most profitable and jealously guarded operations of the big banks - Mr. Waugh and Mr. Hodgson are looking to steal customers from the competition in the most Canadian way possible: by tugging on the heart strings of the country's hockey moms and dads. Scotiabank, now the official bank of the NHL, is calling itself "Canada's Hockey Bank," making its support felt in rinks across the country, and has struck a deal with a hockey equipment chain to offer discounts to its customers.
It appears the bank's domestic strategy is paying off. Scotiabank said yesterday that it earned $500-million in Canada in its latest quarter, a new record, despite socking away $169-million for troubled loans. (In total, Scotia's profit was $931-million, down from $1.01-billion a year ago, on record revenue of $3.8-billion.)
In Canada, Scotiabank held $119.9-billion in mortgages, up from $112.3-billion a year ago. Personal loans rose 21 per cent to $35.8-billion.
Analysts are asking executives at the big banks what they intend to spend their excess capital on.
It's a good question, Mr. Waugh suggested. "The world is into a new norm. Repricing has taken place, so sellers' expectations and buyers' expectations may be starting to narrow in and that may create some opportunities."
He has looked at some significant ones, and he'll continue to take a look at big deals in the future, he said.
But will he crank up the speed on his treadmill by actually following through on a major acquisition? "Never say never," he said. "But I would put it at a low probability."
What investors should know
- COMPANY PERFORMANCE
- Like all the Canadian banks, Bank of Nova Scotia suffered a sharp decline in profits during the financial crisis. But it has rebounded in a big way. Key to its strong third-quarter result was a record quarterly profit of $500-million in its Canadian banking unit. Its international banking division, which includes large operations in Mexico and the Caribbean, hasn't bounced back as swiftly.
- STOCK PERFORMANCE
- After being crushed in the banking meltdown, Scotiabank shares have nearly doubled since late February, and closed at $46.40 yesterday - about $8 short of the all-time high. Some analysts wonder if they've gone too far, too fast. BMO Nesbitt Burns analyst Ian de Verteuil, pointing to growing credit problems in Scotiabank's portfolio of international business loans, wrote: "The issue for investors is whether now is the right time to have exposure to emerging markets." He has a $42 price target on the stock.
- BANKING SECTOR
- Canadian banks' continue to expand their balance sheets, despite the recession. In fact, their assets are growing partly because of the recession. Competing lenders have disappeared and alternative sources of capital have dried up. One eyebrow-raising figure: Bank of Canada data show personal credit lines by chartered banks have increased 21 per cent in the past year.