SANTIAGO, CHILE — Two things were apparent to Brian Porter when he became chief executive of the Bank of Nova Scotia in late 2013: The first was that there would be costly post-financial crisis “re-regulation;” the second was the potential of Latin America.
What came next was a fighting retreat that saw Canada’s third-largest bank exit approximately 20 countries and make a few key acquisitions to reorient its business around six markets: Canada, the United States, and the four so-called Pacific Alliance nations of Chile, Colombia, Mexico and Peru.
A lot of time and money went into the strategic withdrawal, with one analyst noting “the renovation must have required a small army of corporate development personnel.”
The changes extend as far as even the boilerplate on the bank’s press releases. Toronto-based Scotiabank, which once had outposts in far-flung places such as Egypt, Haiti and Russia, no longer goes by “Canada’s international bank.” Instead, it is now “a leading bank in the Americas.”
But when the word “legacy” comes up in a question, Porter shoots a quick here-it-comes glance at a nearby staffer.
Seated on a couch in a swish hotel in Santiago, and wearing what could be the Scotiabank uniform — blue suit, white shirt and red tie — Porter said he doesn’t see the repositioning efforts in such a context.
“Look,” he said. “I’m focused on, and the team’s focused on, creating a great experience for our customers, producing consistent and predictable earnings for our shareholders and creating value. And that’s what we’ve been doing.”
What Porter and Scotiabank had been doing before he sat down for an interview was showing analysts and investors exactly why the lender has embarked on a grand repositioning campaign. Although the pivot is now “substantially complete” — he said the bank is now the only one with a “significant presence” in each of its six key territories — it has plans to become even more significant in the coming months and years.
Banking is banking wherever you go: take deposits, make loans, earn money from the different rates for the two. But where Scotiabank does business abroad makes it stand out compared to Canada’s other big banks such as Royal Bank of Canada and Toronto-Dominion Bank, which concentrate more on the United States.
Porter called his bank’s geographic footprint a “strategic differentiator,” but he has faced an uphill climb at times selling it. Once known as the “Bank of No Surprises,” there have been a few unwelcome ones, which might explain why the stocks of the other Big Five banks have done better over the past five years.
One shock occurred in Chile, where massive social unrest broke out in October. During the riots, sparked by a small hike to transit fares, more than 20 people died, thousands were injured and billions of dollars in infrastructure and property, Scotiabank branches included, was damaged or vandalized.
A Scotiabank gate is seen graffitied during a protest against Chiles government in Santiago, Chile November 1, 2019.Jorge Silva/Reuters files
The sudden outburst of outrage jolted many observers, because Chile was generally viewed as one of the most stable economies in Latin America. As the demonstrations expanded to concerns about inequality and inadequate pensions and health care, the government at one point called out the army, a shocking development in a country that only cast off a military dictatorship 30 years ago.
Scotiabank has bet big on Chile, having just shelled out approximately $2.9 billion in 2018 for a majority stake in a local bank. And from all appearances, Chile’s “bump in the road” — Porter’s words — has not shaken Scotiabank’s confidence in the country, or Latin America for that matter.
Instead of backing down from the region, Porter and the bank have doubled down. The protests in Chile forced Scotiabank to postpone an October investor event in Santiago until last week, but when the presentations finally began, the lender outlined a strategy focused on growing even larger in the Pacific Alliance countries.
Over the course of two days, analysts and investors heard a bunch of demographic and economic reasons why this strategy makes sense: Chile’s poverty rate has dropped to single digits, the median age of Peru’s population is 27, and banking penetration in Mexico is only 35 per cent.
“This is an economic success story,” Porter said during a break in the action. “We are very comfortable in the countries we operate. And we’re here for a reason.”
Scotiabank’s comfort level in Chile is evident. In Santiago, there are branches everywhere, including one just a short stroll from the presidential palace still bearing bullet marks from the 1973 coup d’état that helped bring dictator Augusto Pinochet to power. Although a number of branches were damaged or vandalized in some way, it was business as usual within.
But the No. 1 reason for Scotiabank hosting an investor event so far away from Bay Street could be boiled down to one number: $3.2 billion. That’s the approximate amount of adjusted earnings the bank’s international unit took in during 2019, nearly double the $1.7 billion booked in 2014. Any of Canada’s big banks would find it difficult to achieve that kind of growth back home.
This is an economic success story. We are very comfortable in the countries we operate. And we’re here for a reason
The bank is now essentially all-in on the Americas, where approximately 95 per cent of its earnings are generated; 85 per cent comes from the bank’s six key markets.
Still, in all four of the Pacific Alliance markets there are certain problems, which Scotiabank acknowledged in an investor-day slide outlining the toll taken on the economies of Chile, Colombia, Peru and Mexico by social unrest, low oil prices, a bribery scandal and the trade policies of U.S. President Donald Trump, respectively.
Porter said the Pacific Alliance countries have shown they are “inherently resilient.” And such issues also wouldn’t be out of place in Canada, which has also been affected by low oil prices, a bribery scandal (involving engineering firm SNC-Lavalin Group Inc.) and Trump trade wars. From time to time, Canadians, too, have engaged in unrest.
However, some issues still persist in the Pacific Alliance, whether it be Mexico’s sluggish economic growth, Peru’s newly elected but deeply divided congress and, of course, Chile’s social unrest, which will likely take a bite out of economic growth as well as the earnings of Scotiabank and other local lenders.
The unrest isn’t totally over, either.
The Friday following Scotiabank’s investor event, people were selling bandanas for 1,000 Chilean pesos (about $1.70) and goggles for 2,000 pesos ($3.40) on a main street leading up to the Plaza Baquedano, a gathering place for the protests.
Along the route, a lot of the sidewalk was gone, and a number of buildings had broken windows and spray-painted walls. The graffiti ranged from a beaver with a Molotov cocktail to a bus-station message declaring “no to the TPP,” an apparent reference to the Trans-Pacific Partnership free-trade deal that Canada and Chile are party to, but which Chile has yet to ratify.
People walk near a burned bus after anti-government protests in Santiago, Chile, January 30, 2020.Edgard Garrido/Reuters
In the plaza, the entrances to the subway, which hasn’t stopped there for months, are sealed up. In one entrance, there is a memorial, with names of those who have died during the unrest written on signs placed in a planter. Strung up above the monument are what seem to be decorative eyeballs. Police had used rubber bullets during the protests, and numerous Chileans reported suffering eye injuries.
Later that Friday, a group of people began to assemble in the shadow of a building near the Plaza Baquedano. As the crowd grew larger, a few people shot fire extinguishers off onto the heavy traffic that passes through the area. Others waved flags in the middle of the plaza.
The group was definitely smaller than the ones seen last fall, when seas of people marched in the streets of Santiago, but it still grew large enough to disrupt a main street in a major city.
Helping calm everyone’s nerves was that it was the holiday season in Chile, and even concerned citizens need a vacation. Announced reforms and the upcoming referendum in April on whether to amend the constitution have also managed to cool things off as well, but they may have only bought the government some time.
There is uncertainty about exactly why the protests are happening. Ignacio Briones Rojas, Chile’s finance minister, gave a presentation during Scotiabank’s investor day noting violence had “diminished significantly,” but he was also quizzed by one analyst about what “key historical policy mistakes” were made that led to the social unrest.
“This is the million-dollar question,” the minister said. “And I am afraid I don’t have a very precise answer.”
Briones Rojas went on to say that the problem was not simply income inequality, an area where Chile has improved, but inequality of opportunities. For example, although university enrolment is increasing, students might be in for a letdown when they graduate and find a lack of opportunities in the job market.
Demonstrators wave a Chilean flag during a protest against policies of President Sebastián Piñera on January 24, 2020 in Santiago, Chile.Marcelo Hernandez/Getty Images
Porter said in an interview that there had also been an “intelligence breakdown,” with people from outside Chile “that came in with an intention of creating havoc.”
He pointed to a recent New York Times story, citing the work of the U.S. State Department, that reported that almost 10 per cent of all the tweets supporting the protests last October were tied to Twitter accounts with a high likelihood of Russian connections.
Such claims of foreign interference have prompted skepticism and pushback in the country. Even the Times piece quoted an official from a public-opinion organization stating “there hasn’t been any proof that there was foreign meddling.” And Reuters in December reported that the head of the country’s human rights institute told a radio station the “immense majority” of online content had been authentic.
Regardless, the priority for Chile’s government “is to deliver the social agenda,” said Rodrigo Yáñez, the country’s vice-minister of trade.
Yáñez visited Canada in December with a Chilean delegation to meet institutional investors, mining companies and the Canadian government. At least part of the mission’s purpose was to reassure them that the country would continue to be open for business, even if it was dealing with what Yáñez called some “growing pains.”
Fixing the problems that prompted Chileans to take to the streets will cost money, and the government has done a roadshow to explain how it would finance the social agenda and “reactivate” the economy, Yáñez said. This will be done partly via higher taxes on richer Chileans, and with a US$5.5-billion stimulus package.
There has even been some talk about increasing criminal sanctions for antitrust violations, Yáñez told the Post. Competition policy may seem like a departure from the debate raging around inequality, but price fixing has helped heighten the feeling of unfairness in the country.
“This is a situation that is not unique to Chile,” Yáñez said.
Porter said the Chilean government’s response to the recent crisis serves as a bit of vindication for the decision to invest there and in the Pacific Alliance.
A Scotiabank branch in Santiago, Chile, in 2014.Ronald Patrick/Bloomberg files
“If that happened in some countries, they may not have the financial flexibility to make adjustments to pension plans, make adjustments to how universities are funded, and who pays the tuition, or make adjustments to health care,” he said. “These are really well-run countries from a macroeconomic standpoint.”
Scotiabank’s plans call for it to take full advantage of these economics, with the bank now intending to squeeze even more from an Americas-heavy footprint.
In Chile, for example, Scotiabank shareholders recently approved a capital raise of approximately US$320 million “to support future growth,” a bank spokesperson said. In Peru, there are opportunities to grow in “low-penetration segments” such as small and medium-sized business banking.
In Colombia and Mexico, where Scotiabank is still seeking to gain more than 10 per cent of the market, another acquisition may be possible, although nothing is imminent, Porter said.
“At some stage, there’ll be more consolidation in Colombia and Mexico,” he said. “We haven’t missed anything in terms of acquisitions, and we’ll look at each one individually as that comes up.”
Other plans include selling insurance, since the level of coverage in Latin America is relatively low, as well as managing more of wealthy Latin Americans’ money and helping to sell more of the debt and stock of companies and governments.
The bank has been investing in most of the four Pacific Alliance countries for around 30 years, and it has become one of the biggest players there, with a presence in all customer segments, according to Ignacio Deschamps, the group head of international banking and digital transformation at Scotiabank.
“The bank is perceived as a very strong institution in the four Pacific Alliance countries,” he said. “And I think our track record of acquisitions shows that we are welcomed and we are invited, even, to grow our scale in the markets.”
Banking systems in the region remain strong, according to Felipe Carvallo, an analyst at credit rating agency Moody’s Investors Service, especially so in the countries where Scotiabank is concentrating its energies.
However, he adds, “in each country, the banks are facing lower growth than before, so that could create some asset quality problems going forward, especially related to expectations of growth.”
Scotiabank is still targeting overall earnings per share growth of seven per cent or more over the medium term, but the target for growth of net income after tax for international banking is nine per cent or more, underscoring how much growth is expected from Latin America.
During Scotiabank’s investor event last week, Santiago showed plenty of potential — both positive and negative. The city was looking “fabulous,” Porter said in an opening address at Scotiabank’s office tower. The building looks out over the city, including the nearby Costanera Center, which includes a glittering skyscraper and bustling mall.
Mountains surround the city of around six million, providing an attractive backdrop. There are reminders of the unrest, such as how Santiago’s metro still doesn’t stop at Baquedano, but people carried on as usual: staring at their phones on the subway, shopping at Falabella, a department-store chain, and generally enjoying the 30-degree temperatures of a Chilean summer.
For better or for worse, Porter will be known for Scotiabank’s pivot to Chile and the rest of the Americas. But, for now at least, he’d rather share credit, instead of talk legacy. “There’s lots of things that the team has done over the last six or seven years that they can be very proud of.”
Financial Post
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