Bank of Nova Scotia brass used to throw an annual holiday cocktail party for journalists and spiced up the event a few years back by serving up pisco sours, a Peruvian favourite, to celebrate an acquisition in the South American country.
If they hold the bash this year, a shot of Mexican tequila or a Chilean Borgona wine punch, with fresh strawberries, may be required, if Scotiabank chief executive Brian Porter can deliver on an acquisition-based international growth strategy that boasts higher potential returns and less risk that the U.S. expansion plans playing out at rival Canadian banks.
Scotiabank turned in better-than-expected financial results last week, with quarterly profit up 11 per cent to $2.06-billion, due in part of the strength of its Latin America operations. Mr. Porter made it clear that his well-capitalized bank plans to continue expanding in the region, highlighting the possibility of making acquisitions over the next year in Mexico and Chile.
Scotiabank has deep roots in both countries; it currently owns the seventh largest bank in both Mexico and Chile, measured by assets. Mr. Porter said he wants to bulk up franchises in both countries, to increase their profitability. The Canadian bank has approximately 6 per cent of the market in each country, and last week, Scotiabank executives said the goal is to increase that share to 10 per cent or more.
As Scotiabank targets a slightly smaller regional rival to hit that 10-per-cent market-share threshold, the Canadian bank is working through a relatively short list of takeover targets – approximately a dozen banks in both Mexico and Chile fit the bill. As he considers where to make a move, Mr. Porter can take advantage of deal-making dynamics that are far more favourable than what's facing the four other major Canadian banks, which are looking for growth from the U.S. market.
Scotiabank's playbook in Latin America is to either buy branches from global banks that are leaving the region, or take stakes in family-owned banks with an eye to taking full control over time. It snapped up operations in Costa Rica and Panama when Citibank quit the countries in 2012. The same year, Scotiabank moved into Colombia by taking a stake in a bank owned by one of the country's wealthiest clans, an allegiance that opened doors in a region and aligned Scotiabank's interests with those of the bank's founders.
In Mexico and Chile, there are a number of banks slightly smaller than Scotiabank that are either owned by foreign institutions, or controlled by families or financial conglomerates.
There are several European banks on this list that are retrenching, as part of the lingering hangover from the global financial crisis, and may be open to raising capital by selling Latin American branches. The family-owned banks in Mexico and Chile likely already have ties to Scotiabank, which has been operating in Latin America and the Caribbean since 1889.
On any potential Latin American takeover, Scotiabank is likely to be bidding against a relatively small number of rivals; HSBC and Spain's BBVA may also step up, as would the largest domestic players in each country. If successful, Scotiabank can look forward to cost-cutting synergies when it marries up an acquisition with its existing branches in the country. That translates into deals at attractive valuations.
In contrast, recent U.S. takeovers by Canadian Imperial Bank of Commerce and Royal Bank of Canada featured premium prices with limited synergies, as the domestic banks acquired beachheads in the Midwest and California, respectively.
And if Mr. Porter can build more scale in Scotiabank's Latin American operations, he'll boost profitability at a division that already sports a healthy 14-per-cent return on equity (ROE).
Again, contrast that return to the 10 per cent ROE that Toronto-Dominion Bank earned in the most recent quarter from its 1,300 U.S. branches, the largest network owned by a Canadian bank. U.S. retail banking is intensely competitive and even the largest branch networks are hard pressed to match the profit margins and growth potential of a well-run Latin American franchise.
The drawback to Latin American expansion is what bank executives dryly refer to as "country risk," or the potential for a government to go off the rails financially. Scotiabank took a $600-million (U.S.) hit when it shut down operations in Argentina in 2002 following a currency crisis in the country.
Mr. Porter can be expected to put prudent limits on Scotiabank's overall investment in any region. Even if the Canadian bank doubled the size of its businesses in Mexico and Chile, Scotiabank has more than enough capital to deal with problems in the region. And in President Donald Trump's United States, there's country risk in the U.S. market, in the form of potential border taxes.
Scotiabank has compelling reasons to do deals in Latin America, and toast the transaction with an exotic beverage to ring out the year.