Scotiabank: In through the out door
As other international banks take flight from Latin America, Canada’s Scotiabank is aiming to add scale. Will it succeed where others have given up? Or will it come to regret the risks inherent in a contrarian strategy?
Illustration: Tom Hughes
Many equity analysts point to Scotiabank’s international strategy as the key differentiator among its Canadian banking peers.
Scotia now earns almost 25% of its earnings from its international operations; 61% of those come from its Pacific Alliance operations in Chile, Colombia, Mexico and Peru.
According to a BMO Capital Markets report in October 2015: “[International banking] provides the bank with geographic diversification and better long-term prospects, in our view.”
But perhaps the bigger issue for the bank’s shareholders is that Scotia is also differentiating itself by building up in a region that many other international banks are eager to leave.
On the other side of Scotia’s recent acquisitions in Peru, Panama and Costa Rica was Citi, which is busy withdrawing from many consumer businesses in Latin America. HSBC is in the departure lounge too, selling its once crown-jewel Brazilian franchise. And other European banks are exiting a mix of retail, customer finance, corporate and investment banking businesses across the region.
A recent increase in regulatory and compliance costs and risks is certainly a factor for the exit of the Anglo-Saxon franchises – but the central issue is banks’ inability to generate enough return on equity.