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Streetwise Sunny days are long gone for Canadian banks’ Caribbean operations

The latest sign of the banks’ wavering commitment to their Caribbean arms is that Bank of Nova Scotia is reportedly considering options for its Puerto Rican business, according to Bloomberg. The island’s debt was downgraded earlier this year and there are widespread concerns that the economy will take a long time to rebound.

Jeff McIntosh/The Globe and Mail

They put on a brave face in public, swearing they are committed to the region, but in private, Canadian bank executives have admitted desires to revamp their Caribbean operations.

If only there were bidders to help them with that task.

The latest sign of the banks' wavering commitment to their Caribbean arms is that Bank of Nova Scotia is reportedly considering options for its Puerto Rican business, according to Bloomberg. The island's debt was downgraded earlier this year and there are widespread concerns that the economy will take a long time to rebound.

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Scotiabank isn't alone in its skittishness. Seven years after the financial crisis started, Canadian lenders with sizable Caribbean activities – Scotiabank, Royal Bank of Canada, and Canadian Imperial Bank of Commerce – are all wrestling with what to do about their businesses in the region.

When they first went in, the landscape looked incredibly lucrative because tourism was booming. In 2006, CIBC doubled down on its stake in FirstCaribbean International Bank Ltd., shelling out $989-million (U.S.) to do it, and in 2007, RBC acquired RBTT Financial Group for $2.2-billion.

But then the tourism dollars dried up as the financial crisis took hold, and the banks were stuck with the hefty loans they made to now-troubled companies such as hotel developers. The problems with these loans first flared up publicly a few years ago, and last December both RBC and CIBC kick-started a flurry of bad news by announcing restructuring charges.

Since then, there have only been more negative developments, with RBC announcing the sale of its Jamaican unit to a rival lender, including an after-tax loss in the process, and CIBC incurring a $420-million after-tax goodwill writedown on its Caribbean operations.

You are forgiven if Scotiabank's possible divestment of its Puerto Rican operations comes as a surprise. Just last week, Scotiabank chief executive officer Brian Porter spoke to The Globe and Mail in Washington, and he stressed a commitment to the region.

"We've become the pre-eminent bank in the Caribbean," Mr. Porter said. "We've seen a lot of people leave or shrink their operations. That's not what we're doing."

So would Scotiabank seriously consider a partial sale or restructuring? Keep in mind that there is a lot of leeway in Mr. Porter's public words – as well as in those from other banks' executives.

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Behind the scenes, two of the Canadian lenders operating in the region have acknowledged to The Globe and Mail that they are more or less stuck with their current businesses because there are no bidders for any of the assets. Should buyers materialize, they would happily reconsider their options.

And even though the banks have stressed commitments to the region, it doesn't mean they won't consider one-off asset sales – especially on islands with tourism-driven economies. Those countries whose economies have heavy commodity exposure are widely viewed as being more attractive.

It's easy to see why. The International Monetary Fund divides the Caribbean nations into two groups: commodity producers such as Belize, Trinidad and Tobago, Guyana and Suriname, and those islands whose economies are tourist-driven, such as Jamaica and Barbados. The gross domestic product of the four commodity producers increased by 2.9 per cent in 2013; the GDP of the second group climbed only 0.9 per cent last year and had effectively zero growth in 2012.

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