Bank of Nova Scotia (TSX:BNS) has agreed to pay about US$1 billion in cash and stock to buy control of a bank in Colombia, part of its ongoing expansion in Latin America.
Canada’s most international bank said Thursday it will pay US$500 million cash and 10 million of its common shares to acquire 51 per cent of Banco Colpatria, a big credit card issuer in the South American country.
The shares were worth C$517.3 million when the deal was announced before stock markets opened Thursday.
“Our investment in Banco Colpatria is a strategically important addition to our Latin American footprint. It represents an important link between our South American and Central American operations,” said Brian Porter, the head of Scotiabank’s international banking arm.
“We are partnering with a first-class operator who has managed the bank exceptionally well for decades and in a way that is highly complementary to Scotiabank’s culture and values.”
Scotiabank, with 70,000 employees, already operates in 13 countries across Latin America — from Peru and Chile to Brazil, Venezuela, Panama, Guatemala and Mexico.
The Toronto-based financial services giant is also the biggest bank in the Caribbean and has businesses in Asia and other parts of the world.
In Latin America, the growth in credit card use and traditional financial services such as mortgages and consumer loans puts the bank in a position to cash in on solid economic growth and expansion of the middle class in the region.
“We think we can take some of the skill-set that Colpatria’s developed in credit cards and export that to other countries or other regions, for sure. That’s one of the attractive parts of this transaction,” Porter said.
While many Canadian banks have also been diversifying into emerging markets for growth — mostly in Asia — Scotiabank has targeted Latin America.
Thursday’s acquisition in Colombia illustrates its strategy to acquire a small stake in a country that it entered about a year ago — and establish a local presence, learn the market and then grow to make “more of a splash,” said Craig Fehr, a financial analyst with Edward Jones.
“There’s a compelling amount of commercial, business or personal lending opportunities, as personal wealth increases in countries like that,” he said.
“I think (the bank is) looking to capitalize on that and they’re doing it in a manner that they’ve done for as long as we can remember in terms of their international growth strategy.”
Emerging markets tend to carry higher growth rates, but also more risk from higher loan losses and delinquency rates because personal lending behaviour is less developed than in domestic markets where growth rates are slower, Fehr said.
“Some of those lending lines like credit cards, and even mortgages to some extent, are not quite as ingrained in the culture as they would be in some developed markets.”
Not all of Scotiabank’s forays into South America have been successful. In 2002, it took a $540 million charge on its books after its subsidiary Scotiabank Quilmes, stopped operations in the wake of a government debt crisis in that country.
Scotiabank said it plans to integrate its own wholesale operations in Colombia into Banco Colpatria, which is Colombia’s fifth-largest financial group, with a network of 175 branches and 308 automatic teller machines.
Colpatria is Colombia’s second-largest credit card issuer and about half of the portfolio is with customers of a Colombian utility company.
As a result, Colpatria’s card loss ratio has been very low relative the market and that business has contributed to historical net interest rates of between 8.1% and 8.3%, Scotiabank officials told analysts.
Scotiabank will have a majority of the seats on Colpatria’s board of directors will select many of Colpatria’s key executives, including the deputy chief executive officer, chief financial officer, chief risk officer and chief auditor.
It also has the right to acquire the remaining 49% of Colpatria in seven years at a fair market price, to be determined by an agreed-upon approach.
The Scotiabank shares will be subject to a 40-day hold after the deal closes, probably near the end of 2011 after necessary regulatory approvals.
The bank expects Mercantil Colpatria to hold onto some of the Scotiabank shares, but he didn’t know how many.
The shares in this transaction represent less than one per cent of the Canadian bank’s total common shares.
Scotiabank shares were little changed Thursday afternoon, falling 28 cents or less than one per cent to $51.45 on the Toronto Stock Exchange.
With files from Sunny Freeman