Bank of Nova Scotia's offer to take a $2.9 billion stake in a Chilean bank is a credit negative for the bank, says a report from Moody's Investors Services.
Scotiabank's offer to acquire a stake in BBVA Chile would mean allocating more capital to international markets, "where it has less market presence and pricing power than in its home market of Canada, where its franchise is strong," the report explains.
Depending on how the deal shakes out, Scotiabank's common equity Tier 1 capital ratio would fall by between 100 and 135 basis points, the report says.
In addition, although BBVA Chile's assets only represent around 3% of Scotiabank's assets, the report says the offer represents approximately 5% of Scotia's common shareholder equity.
The combination of Scotiabank's existing operations in Chile and BBVA Chile would create Chile's fourth-largest bank, according to the report.
"BBVA Chile has an established franchise and brand as Chile's seventh-largest bank. It also has a conservative loan mix, which results in strong asset quality," the report says. "Nevertheless, profitability is low."
"Merging with [Scotiabank's] existing operations in Chile would create a stronger competitor than either has on a standalone basis. BBVA Chile's credit strengths include asset quality and an established franchise, while its challenges are weak capitalization, modest profit margins reflecting a conservative loan mix and high costs, and a heavy reliance on wholesale funding," the report concludes.