File photo of a Scotiabank location in Toronto.Deborah Baic/The Globe and Mail
Nearly 10 months after Bank of Nova Scotia announced it would acquire a controlling interest in the Chilean financial services division of Cencosud SA, a Latin American retailer, the lender announced Friday that the deal has been completed. The issue now: Figuring out whether Cencosud is much of a prize.
The deal, valued at about $280-million (U.S.), certainly fits with the bank's priorities of increasing its market share in Latin America (it currently has 6-per-cent market share in Chile) and expanding its credit card operations.
It gives Scotiabank a 51-per-cent stake in a business that includes more than 2.5 million credit cards and nearly $1-billion in outstanding balances, making the bank Chile's third-largest credit card provider.
More important, it gives the bank the opportunity to sell customers additional banking services, such as chequing accounts, mortgages and car loans.
"We get to cross-sell two million Cencosud customers with our product," Brian Porter, chief executive officer of Scotiabank, said at the Canadian Bank CEO Conference in January, drawing parallels to its 20-per-cent stake in Canadian Tire Corp.'s financial services division. "We think there's a lot of leverage in that."
Except that Cencosud is no Canadian Tire. While the Canadian retailer's share price has zoomed to a succession of record highs in recent years, Cencosud's shares touched six-year lows earlier this year and have slumped 16 per cent (in local currency terms) since the deal with Scotiabank was announced last year.
You can't blame the decline on fickle investors. Cencosud's full-year earnings have fallen for four straight years, on a per-share basis, and management has missed analysts' expectations in six of the past eight quarters. The company's CEO quit unexpectedly in November.
Why is Scotiabank so upbeat about partnering with a retailer that appears to be struggling? Dieter Jentsch, Scotiabank's head of international banking, said that it boils down to a combination of strong financial position and regional heft.
"They certainly have a commanding market share in Chile," he said in an interview, pointing to the company's 30-per-cent slice of the market. "They are a dominant retailer in this part of the world."
Financially, he noted that the company successfully launched a 30-year, $1-billion debt issue in February. It was oversubscribed, reflecting investor confidence in the company over the long term.
Add the two features together, and Mr. Jentsch believes that the opportunity to sell cardholders additional financial services looks particularly attractive: "[Customers] do have existing relationships and it does take time. But when I look at our average cross-sell rates on new accounts, we're looking at an expectation of more than three products. There is a full suite of solutions we can offer our retail customer."