As part of the sale, Scotiabank will post an after-tax impairment loss of about $1.4-billion in the first quarter of fiscal 2025. A Scotiabank sign is seen outside of a branch in Ottawa on May 31, 2016.Chris Wattie/Reuters
Bank of Nova Scotia is selling its businesses in Colombia, Costa Rica and Panama to Colombian bank Davivienda as the Canadian lender reallocates capital toward its bet on its North American units.
Scotiabank BNS-T will post a loss of about $1.7-billion on the deal, while taking a 20-per-cent stake in Davivienda, as well as gaining representation on its board of directors, the Canadian lender said Monday.
Analysts and investors have speculated that Scotiabank could divest some of its operations in the Latin America region since chief executive officer Scott Thomson launched his strategic turnaround plan at the outset of his tenure in 2023.
“With this agreement, we advance our execution plan towards sustainable and higher returns across our International Banking markets,” Scotiabank head of international banking Francisco Aristeguieta said in a statement. “Davivienda is a proven operator which, through the combined entity, will deliver more scale and become an important partner in supporting our global wealth management and global banking and markets businesses in Colombia and Central America.”
As part of the sale, Scotiabank will post an after-tax impairment loss of about $1.4-billion in the first quarter of fiscal 2025, which ends Feb. 28. The lender expects this to reduce its common equity tier 1 (CET1) – a measure of a bank’s ability to absorb losses – by about 10 to 15 basis points. (A basis point is one-100th of a percentage point.)
The bank also expects an additional loss of about $300-million from the impact of foreign currency changes when the deal closes.
National Bank analyst Gabriel Dechaine said that the 20-per-cent stake is currently valued at about $600-million, compared with the approximately $1-billion Scotiabank paid to acquire a stake in the Colombian operation in 2012 and the US$360-million cost to take over banking operations in Panama and Costa Rica in 2016 from U.S.-based Citibank.
But the deal also allows Scotiabank to offload a poorly performing business and lower costs by partnering with Davivienda to maintain a presence in the region.
“Colombia, in particular, had been a drag on Scotiabank’s bottom line for several years,” Mr. Dechaine said in a note to clients. “Although no timeline has been provided, we believe the 20-per-cent Davivienda stake could be more profitable to Scotiabank than its current position is, considering that its new partner has existing operations in these three countries that should allow it to extract expense synergies.”
Over the past few decades, many of Canada’s banks have sought growth in global markets, largely in the United States. But Scotiabank had set its sights on Latin America for growth, specifically in a group of countries it refers to as the Pacific Alliance: Mexico, Colombia, Peru and Chile.
Scotiabank’s Colombian operations have struggled the most in the Pacific Alliance in recent years. Its return on equity (ROE) – a key industry metric that measures profitability – in the fourth quarter of fiscal 2024 was 1.2 per cent, far lower than Mexico at 21 per cent, Peru at 19 per cent and Chile at 10 per cent.
Scotiabank’s new turnaround strategy in part hinges on its bet on growing business opportunities across Canada, the U.S. and Mexico. During its investor day in December, 2023, the lender said that it will allocate 90 per cent of its capital – up from 70 per cent in 2023 – to its key businesses in Canada, the U.S. and Mexico, where it believes it will benefit from the $1.6-trillion in annual trade between the three countries, as well as the Caribbean.
Scotiabank had said that it planned to turn around its beleaguered operations in Colombia and Central America, or exit those markets entirely.
In September, Mr. Thomson said the bank was still working on rehabilitating its business in Colombia.
“We’re working very hard to turn those around, and I think there is some progress,” Mr. Thomson said during a conference hosted by Scotiabank. “You’ve seen expenses reduced in Colombia, as an example, despite a pretty significant inflationary environment. But there’s more work to do, and we’re acutely aware of the fact that that’s a drag on overall ROE, and a drag on the ROE of the international bank.”
The bank intends to enter into an agreement with Davivienda that will allow the banks to refer business to each other. Scotiabank said this will allow it to continue supporting corporate, wealth and capital markets clients with services from the Colombia-based bank.
Davivienda has operated in Latin America for more than 50 years, serving more than 24.6 million clients with operations that span Colombia, Costa Rica, El Salvador, Honduras and Panama, as well as Miami in the U.S.
Scotiabank also said Monday that the sale of some of its businesses in Latin America is part of its plan to bolster operational efficiency – a metric that assesses a bank’s ability to reduce costs while boosting revenue – in markets that it believes are no longer part of its core business.
“The deal ticks the box for [Scotiabank] in terms of its strategic plans while it does not negatively impact its earnings outlook, as we believe that contributions from these countries were minimal at best (Colombia reported a modest loss for 2024),” Jefferies analyst John Aiken said in a note to clients.
The deal is subject to regulatory approvals. Scotiabank expects to close the transaction in the next 12 months. Its CET1 ratio could be boosted by about 10 to 15 basis points as the lender sheds risk-weighted assets.