Traffic and pedestrians pass by a Scotiabank branch on Bloor Street West in Toronto in this file photo.Darren Calabrese/The Globe and Mail
Bank of Nova Scotia is pushing deeper into Latin America with a $2.9-billion bid for control of a Chilean rival, looking to ignite its growth as the bank's fourth-quarter profit edged higher but missed expectations.
The first of Canada's big banks to report for the quarter, Scotiabank saw its quarterly profit rise by 3 per cent to more than $2-billion, compared with a year earlier, on the strength of solid growth in Canadian banking and growing international returns. But margins tightened in key foreign markets, and executives at Canada's third-largest bank are keen to bulk up in Latin America, bolstering a vital pipeline for future growth.
With a formal offer to buy Banco Bilbao Vizcaya Argentaria S.A.'s 68-per-cent stake in subsidiary BBVA Chile, Scotiabank hopes to roughly double its share of Chile's banking market, to 14 per cent. By combining existing operations in the country with BBVA Chile's $29-billion in assets, 4,000 employees and 127 branches, Scotiabank would create Chile's third-largest non-state owned bank.
While several of Canada's largest banks have anchored their international operations in the highly competitive U.S. market, Scotiabank is focused on four countries in Latin America: Mexico, Peru, Colombia and Chile. And even as the region has lately been battered by natural disasters from hurricanes to earthquakes, Scotiabank's fourth-quarter profits from the region jumped 11 per cent, comfortably outstripping the bank's growth rate in the mature Canadian market.
BBVA is willing to accept Scotiabank's offer if Chile's Said family – a minority partner that owns more than 31 per cent of BBVA Chile – chooses not to exercise a first right of refusal. The deal would likely close in the summer of 2018 if Scotiabank's bid succeeds.
"We've done extensive work on this; we know the asset very well," president and chief executive officer Brian Porter said on a conference call with analysts.
Scotiabank executives were not available for interviews on Tuesday.
In the fiscal fourth quarter, which ended Oct. 31, Scotiabank earned $2.07-billion, or $1.64 a share, compared with $2.01-billion, or $1.57 a share, in the year-earlier quarter.
Adjusted for certain items, Scotiabank earned $1.65 a share – just shy of the $1.66 analysts expected when polled by Bloomberg LP.
"Although modest, this was Scotia's first earnings miss in several quarters," said John Aiken, an analyst at Barclays Capital Canada Inc. "This may also place a modest reset on expectations for the group in the remainder of the quarter."
For the full year, the bank earned $8.24-billion in profit, up 12 per cent from a year earlier. But adjusting to exclude a restructuring charge recorded in 2016, underlying profit rose 8 per cent.
Scotiabank also slashed costs by $500-million in 2017 – well ahead of the $350-million it had forecast – reaping the financial benefits of last year's restructuring. That left extra cash to ramp up spending on technology, which grew by 14 per cent to more than $3-billion for the year.
"We think the bank's in a very good spot," Mr. Porter said. "We look forward to a very constructive year next year."
Scotiabank's outlook for its international arm is optimistic after fourth-quarter profit climbed to $605-million, from $547-million a year ago, even as its Latin American operations were besieged by Caribbean hurricanes, flooding in Peru and a major earthquake in Mexico.
The bank's capital markets arm is looking to rebound after a sluggish fourth quarter in which profit dropped 15 per cent to $391-million. Lower volatility compared with the fourth quarter last year, when investors were reacting to an unexpected Brexit vote, "resulted in trading revenues falling off considerably," said Dieter Jentsch, group head of global banking and markets, adding: "We anticipate a much more pro-active trading environment in the next quarter."
Profit in Scotiabank's Canadian banking operations rose by 12 per cent in the quarter to more than $1-billion. But excluding gains from the sale of HollisWealth, an independent adviser network, profit in the division was up 5 per cent.
The bank's mortgage book grew by 5 per cent year over year. But in January, new mortgage underwriting standards will take effect, introducing tougher stress testing that will make it harder for some prospective buyers to qualify for uninsured home loans. "It will represent a bit of a headwind," Canadian banking head James O'Sullivan said, speculating that the bank may originate about 5 per cent fewer new mortgages as a result.
Scotiabank was also the first of Canada's biggest banks to disclose the initial impact of a new accounting rules introduced on Nov. 1. The IFRS 9 standard is expected to make the provisions banks set aside to cover bad loans more volatile. The bank reported a $600-million after-tax charge to retained earnings and expects its common equity Tier 1 (CET1) ratio – which helps regulators measure a bank's health – will be reduced by 15 basis points (100 basis points equal one percentage point).
Scotiabank's capital levels were robust as of Oct. 31, with a CET1 ratio of 11.5 per cent, leaving enough room to fund the BBVA Chile acquisition with existing capital if it goes ahead.