Canada’s most international bank, Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) continues to bolster its presence in the rapidly growing region of Latin America. After going on a buying spree earlier in the decade, the bank has embarked on yet another initiative aimed at expanding its operations. This makes it an appealing play on emerging markets in a region that has been historically underbanked.
Now what?
Bank of Nova Scotia’s latest transaction is its decision to acquire Citigroup Inc.’s consumer and small to medium enterprise business in Colombia through its subsidiary, Banco Colpatria Multibanca Colpatria S.A. Bank of Nova Scotia owns a 51% controlling interest in Banco Colpatria, which is the Andean nation’s fifth-largest bank, managing $13 billion of assets.
If the deal is successful, it will significantly boost its operational footprint in Colombia, adding 47 branches and 424 automatic teller machines. The terms of the deal have yet to be announced, but given Citigroup’s desire to exit many of the foreign markets in which it is operating, it should be on favourable terms for Bank of Nova Scotia.
The deal comes on the heels of Bank of Nova Scotia announcing in November 2017 that it had agreed to buy Spanish bank Banco Bilbao Vizcaya Argentaria S.A.’s, better known as BBVA, stake in its Chilean subsidiary. If successful, the US$2.2 billion acquisition would make Bank of Nova Scotia Chile’s third-largest privately owned bank. The purchase will give its business considerable scale in what is considered Latin America’s most advanced and stable economy.
Chile, the world’s number one copper producer, and Colombia, Latin America’s fourth largest producer of oil, both stand to benefit from the global economic upswing that is underway and firmer crude and metals prices.
For 2018, Chile’s GDP is forecast to expand by 2.5%, or more than one percentage point higher than 2017, and 0.9% greater than 2016. Colombia continues to benefit from firmer crude, which analysts are predicting has the potential to drive GDP growth to as high as 3% in 2018, which is one percentage point higher than annualized third quarter 2017 GDP growth. Stronger economic growth in both nations will drive higher business confidence and consumption, which will then translate into greater demand for credit.
That means the deals have the potential to give Bank of Nova Scotia’s earnings a healthy lift, especially once synergies and efficiencies with existing operations are realized. This bodes well for further value to be unlocked for investors by the bank, which has already experienced a solid improvement in its international operations.
For the fourth quarter 2017, net income for international banking grew by a healthy 7% year over year, and return on equity popped by an impressive 1.5% to 15%, thereby highlighting the growing profitability of that business. The solid decent improvement was primarily driven by 15% year-over-year loan growth in Latin American as well as an overall 1% decrease in expenses and an improvement in that business’ productivity ratio.
The solid performance reported by Bank of Nova Scotia for 2017 saw it reward investors with yet another dividend hike in which it increased the dividend by $0.5 or 6% for the year.
So what?
Bank of Nova Scotia has a proven history of successfully operating in Latin America. The latest moves to expand its business in the region will bolster earnings and unlock more value for investors. That makes the bank a must-have investment in any portfolio, giving investors diversified exposure to developed and emerging economies.
