Scotiabank’s secret weapon against slowdown: Latin America

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At some point in the near future, we may need a debate on what to call Bank of Nova Scotia.

I say this because if its international operation continues to post these growth rates, someone could argue that Scotiabank isn't so much a 'Canadian bank' anymore. Rather, it's more like a global bank headquartered in Canada.

For a few years now, Scotiabank's international banking operations have posted profits that are between 85 and 90 per cent of what the entire Canadian retail and commercial division posted. And in the latest quarterly figures, international banking plowed ahead with its fourth straight quarterly profit gain while Canadian banking actually cooled a bit relative to the hot first quarter.

Of course, Scotiabank has sizable wealth management and capital markets operations here, so it's still very Canadian no matter how you slice it. But its international growth certainly is something to watch.

In the second quarter, retail loan growth outside of Canada came in at 10 per cent year over year, excluding Scotiabank's recently acquired stakes in Banco Colpatria and Credito Familiar. Here in Canada the equivalent growth was between 7 and 8 per cent, excluding the ING Direct Canada acquisition.

And Scotia loves to point out that its internal economics team forecasts gross domestic product growth rates of 4.5 per cent and 6.2 per cent for Thailand and Peru, respectively, in 2013, while Canada's expected growth is a meagre 1.5 per cent.

Plus, net interest margins, or the spread that the bank makes between borrowing money and lending it out to customers, are much higher outside of Canada. During the second quarter the international division's margins averaged 4.24 per cent, more than double Canada's 2.08 per cent.

But you need to dig down into the numbers to really understand the true growth driver. For retail loans, Latin America's organic growth was 14 per cent year-over-year while the Caribbean and Central America's was only 5 per cent. (Scotiabank doesn't count its Asian personal loans because they aren't consolidated.)

The disparity is even more shocking for commercial loans. Latin America's organic growth rate was 15 per cent over 2012, but the Caribbean and Central America was flat, and Asia's commercial loans are actually down 4 per cent. That puts Latin America's commercial growth at almost double Canada's commercial loan growth of 8 per cent, excluding the ING acquisition.

For Scotiabank, such Latin American strength is a good thing. The region contributed $1.14-billion, or 62 per cent, of the international division's $1.85-billion in revenues last quarter.

So the diversification strategy is certainly working. The bank just needs to hope that Latin America doesn't have any hiccups.

(Tim Kiladze is a Globe and Mail Reporter.)

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