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ProfilesApril 1 2014

Scotiabank CEO sticking to growth plan

Scotiabank intends to expand its domestic credit card business, despite record levels of household debt in Canada. It also wants to push retail operations in Latin America, a region where economic growth has been largely disappointing in recent years. Chief executive Brian Porter explains the rationale behind what may sound to some like a risky plan.
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Scotiabank CEO sticking to growth plan

Household debt in Canada is historically high, and is now comparable to the sort of debt levels recorded in countries prior to a real estate crash. According to Statistics Canada, the ratio of household debt to disposable income has continued to rise over the past two decades, accelerating from 137% in 2007 to just less than 160% at the end of September 2013. This mirrors the 163% ratio recorded in the US at the time of the financial crisis in 2008. Although not directly comparable, these numbers have been sounding some alarm bells.

While acknowledging that the situation may be worrisome, Scotiabank’s chief executive Brian Porter notes the strengths of the Canadian market – where the real estate sector has traditionally been well regulated and mortgage rules have reduced loan durations over the past years.

The main factor that sets the country apart from others, says Mr Porter, is the conservative nature of Canadian consumers, who have quickly adapted to changing market circumstances. “Consumer indebtedness has gone up but the ability to service that debt has [gone up too]. Canadian consumers have been very savvy. They’ve been savvy in how they played the yield curve in the mortgage market, going from shorter term to longer term and vice versa,” he says.

The bank's close relationship with its clients is making Mr Porter comfortable about the level of risk taken up by the bank in residential mortgages – a market that may reach C$1300bn ($1168.68bn) in size by the end of the year, according to the Canadian Association of Accredited Mortgage Professionals, and in which Scotia says it is a "strong player" with various data sources indicating that the bank's market share is between 15% to 20%.

Taking risks

Mr Porter is so confident in the financial health of Canadians that he not only plays down concerns in sectors such as mortgages and auto loans, where lenders are protected by collateral, but he also wants to expand the bank's presence in the crowded credit card space, where the bank has limited exposure. Scotia’s retail presence was invigorated by the acquisition of ING Direct’s local operations two years ago, which provided an online banking platform with C$30bn of deposits and 1.8 million customers to Canada’s third largest bank by assets, and attracted more than 80,000 new customers last year.

In November 2013, Scotiabank announced that it would add a credit card product to the ING Direct business – which it would rebrand as Tangerine – by 2015. Despite analysts’ concerns about levels of personal debt, now is as good a time as any to launch a new credit card business, according to Mr Porter. “We have a number of businesses under way to increase our presence in credit cards. You might say that now is not an ideal time to do that, but it’s never an ideal time,” he says.

Mr Porter also aims to export the acquired online banking model abroad. “We think that the direct model has some other applications to other countries where we operate, whether it’s Mexico or Chile. [A lot of the staff] that came with the acquisitions have experiences setting up ING business in the US, the UK and elsewhere, so we see great value in [that model and their expertise].”

Mr Porter’s optimism is supported by the bank’s reliable record of financial results, including the most recent quarterly data. Figures for the first three months of 2014 show net income of C$1.7bn and a 15.4% return on equity. They also show a 5% loan book year-on-year growth, which was largely supplied by expansion in the credit card and auto loans divisions. Provision for retail credit losses have, however, gone up to C$118m from the C$106m put aside in the final quarter of 2013, while commercial credit losses provision has also increased.

Going global

Though the domestic market is still Scotia’s most profitable, its international presence is considerable. The bank is Canada’s most international lender, with operations in more than 50 countries, mainly across Latin America and the Caribbean but also in Asia, where it has a significant investment in Thailand’s Thanachart Bank and a joint venture with Bank of Beijing in China.

In spite of a first-quarter dip in international revenues due to foreign exchange and other expenses, loans and deposits generated outside of Canada grew by 17% and 13%, respectively, in the first quarter of this year compared with the same period in 2013. Central and Latin America and the Caribbean are by far the largest contributors to Scotia's international revenues, accounting for 90% of the total C$1.85bn reported for the first three months of the year.

As is the case with other emerging markets, only investors with a long-term plan and a healthy balance sheet can commit to Latin America. This is certainly the case for Scotiabank. Its Tier 1 capital is the second largest among Canadian banks, according to the latest available yearly results of 2013. In its quarter one figures, Scotia reported a Basel III-compliant 9.4% capital ratio on risk-weighted assets of C$302bn.

“As a bank, one of the things that distinguishes us from others is our ability to [invest] long term. Banking penetration [in Latin America] is favourable to us, it has a young population, its middle classes are expanding; [growth] is sustainable and countries will need new products, such as mortgages,” says Mr Porter.

Mortgages are already the largest component of Scotia’s international retail loans portfolio, which is generated entirely in Latin America and the Caribbean; the region is also responsible for two-thirds of international commercial loans.

Good foresight

Scotiabank has made investments in some of the most promising Latin American markets over the years, usually establishing a presence and then growing organically. Since the financial crisis, a number of opportunities have opened up, with weakened banks or emerging market groups looking for an international partner, and Scotia has been quick to move into the takeover game.

Since 2007, the bank has closed about 20 deals across the world, according to Mr Porter. The challenge, he says, is integrating operations. “We have about 20 data centres in Latin America; you don’t need more than two or three – integrating and executing properly is the hard part [of a takeover].”

Mr Porter singles out a couple of deals as being particularly important for the bank, including its purchase last year of 50% of BBVA’s Peruvian pension fund though its local fund, Profuturo AFP, and its 2011 acquisition of Colombian lender Banco Colpatria for about $1bn, which was the bank's largest acquisition to date.

At the time of the Colpatria acquisition, Mr Porter was group head of international banking and, in an interview with Bloomberg, he expressed the bank’s views on the country: “The more we looked at Colombia, the more excited we got about the economic potential.”

He has been proved right, and Colombia, as well as Peru, continue to be highly promising markets. Projected economic data for both places them above the regional average, with Scotia’s own predictions placing gross domestic product growth at 4.5% for Colombia and 5.4% for Peru – the highest among the seven key international markets where Scotia has a presence. These are also predictable markets with limited banking and wealth management offerings, according to Mr Porter.

Beefing up

Wealth management is one of the other expansionary pillars for Scotiabank, both in Canada and abroad. Global wealth management and insurance revenues grew 15% year on year in the first three months of 2014 to more than C$1bn, while net income expanded at a similar pace over the same period to C$327m. Assets under management for the international business reached $153bn, up almost 17% since the first quarter of last year.

“We see great potential for the wealth management business internationally,” says Mr Porter. “We have mutual funds in 19 countries now; a year ago that number would have been 13 or 14.”

Back home, Scotia beefed up its wealth management presence too with the C$2.3bn acquisition of DundeeWealth, which was completed in early 2011 and provided the bank with an additional C$83.3bn in assets under management. It also made Scotiabank the fifth largest mutual fund provider in Canada and the third largest among the country's leading banks, according to data by the Investment Funds Institute of Canada. Scotia says it now has the third largest share of the country’s mutual fund market, at 17.6%, after Royal Bank of Canada’s 32.9% and TD Bank’s 18.4%.

Since the financial crisis, both domestically and abroad, Scotiabank has enjoyed a good ride: strategic acquisitions, plans for new products and new platforms. Will its recent success encourage the bank to accelerate its expansion further? “I think we’re professionally aggressive with a degree of caution,” says Mr Porter. “We don’t want to launch something that is not going to work, we take pride in what we do, we know what our customers want, we know what their expectations are... we want to have products that meet their expectations.”

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Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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