Wednesday, June 14, 2006

Scotiabank to Buy Costa Rican Bank for $330 Million

RBC Capital Markets, 14 June 2006

Scotiabank entered an agreement to buy Corporacion Interfin for $330MM (US$294MM). Corporacion Interfin owns Costa Rica’s largest private bank (non-government) – Banco Interfin.

Investment Opinion

• More Expansion in LATAM. Scotiabank is poised to be the #1 (private) bank in Costa Rica with this deal, and continues to be a leading player in Latin American bank consolidation. In our view, Scotiabank has taken another smart and decisive step in its international build-out. This transaction, while seemingly expensive based at 2.7x price/book (BNS bought Banco Sudamericano in Peru for 1.3x last year), is in our view, both financially and strategically rewarding.

• Early EPS Accretion. The deal is expected to be accretive by $0.03/share in year 1, without the benefit of synergies, and $0.04/share in year 3 assuming earnings growth above 10%. ROE of 21% in year 1 and 20% in year 3 is very respectable and exceeds BNS’ hurdle rate.

• Justifiable Price Premium. The bank paid 2.7x book value for a coveted asset reflecting: (i) the high-quality Interfin franchise, (ii) scarcity value (few acquisition alternatives in Costa Rica), and (iii) a high-potential market. When combined with Scotia’s existing Costa Rican bank, BNS Costa Rica will rank #1 of non-government banks by market share in both loans (13%) and deposits (8%).

• Regulatory Hurdles Almost Cleared. The transaction is expected to close by August 2006 subject to regulatory approval. BNS has already obtained OSFI approval and is awaiting a decision from the Costa Rican banking and securities regulators.

• BNS Capital Ratios To Remain Strong. The impact on BNS’ tier 1 capital and tangible common equity ratio is minimal, declining by 20bps and 23bps, respectively, from 10.2% and 8.6% at the end of Q2/06.

• Valuation. Our price target of $49 is set at 13x our 2007 cash EPS estimate of $3.77. Our target P/E is set at sector neutral to our sector target P/E to balance Scotia’s strong long-term growth prospects and disciplined, focused management team, with its above-average credit exposure and current earnings reliance on securities gains, low tax rate and low loan losses.

Scotia’s international operations are clearly outgrowing North American bank norms, though the overall earnings level is supported by a belowaverage loan loss accrual and tax rate. We also estimate Scotia’s excess capital position at ~$2 billion at the end of Q2/06, down from a superior position within the peer group in prior periods. Our price target is also indicated at ~2.8x our projected book value of $17.76 (as at Jan. 31/07).
The Globe and Mail, Sinclair Stewart, 14 June 2006

Bank of Nova Scotia, which has been burrowing deeper into Latin America for growth opportunities, yesterday agreed to buy Costa Rica's Corporacion Interfin for $330-million, making it the largest privately owned bank in that country.

The acquisition follows a familiar pattern for Scotiabank: spend a relatively modest amount of money to gain significant market share in less developed places such as Peru, Chile, El Salvador and the Caribbean.

The Interfin deal, for example, will more than double the amount of branches Scotiabank operates in Costa Rica to 41, and rank it first among private banks in terms of loans and deposits. The combined operations will have $1.8-billion in assets and 1,250 employees.

Scotiabank said it targeted Costa Rica for several reasons, including its young population, its decent economic growth, and a low penetration of banking services in the country. Interfin is regarded as a strong competitor in both the commercial loan field and the auto leasing market, while its retail operations are only relatively new.

These are the sorts of gambits that have helped transform Scotiabank into Canada's most international bank. Late last year, the bank paid $390-million to create the No. 3 player in Peru. It bought 80 per cent of Banco Wiese Sudameris SAA, and then acquired majority control of Banco Sudamericano.

Unlike some of its Canadian rivals, Scotiabank has eschewed expanding in the U.S. market. The lack of growth prospects at home, however, compounded by a ban on bank mergers, has made the bank more aggressive in building out its global operations.

Yet none of these smaller acquisitions will make much of a dent in the bank's $5-billion worth of excess capital.

In a research note yesterday, Merrill Lynch analyst André-Philippe Hardy said he believes Central American acquisitions are at the top of Scotiabank's list of priorities, since it views this market as less competitive and not as likely to attract other large, global rivals. He pointed out the bank could also likely use a larger platform in Chile.

In the most recent quarter, the bank's international division made $268-million, or almost a third of its entire profit. Interfin is expected to add 3 cents a share to Scotiabank's profit in the first year, and 4 cents a share within three years.

The acquisition is expected to close in August, and is still subject to Canadian and Costa Rican regulatory approval.
Bloomberg, Sean B. Pasternak, 13 June 2006

Bank of Nova Scotia, Canada's third- largest bank, agreed to buy Corporacion Interfin SA, owner of Costa Rica's largest private bank, for U$293.5 million in stock to double its branches in the country.

The purchase will add 24 offices and 950 employees to Scotiabank's Costa Rican business, the Toronto-based bank said today in a statement. The combined assets will rise to U$1.6 billion.

Scotiabank has invested more than U$1 billion since 2000 to expand abroad, primarily in Latin American countries such as Peru, Mexico and El Salvador. Profit from international banking rose 44 percent in the second quarter, to a record C$270 million.

Chief Executive Officer Richard Waugh, 58, has said the bank will continue to invest in international markets where it already has a presence, to offset slower growth in Canada.

``I think the pipeline of potential acquisitions remains full,'' Waugh said in a June 9 telephone interview. ``Latin America is probably our major emphasis right now.''

The bank will have a 13 percent market share for loans in the country once the purchase closes in about two months, Scotiabank said.

Mexico, Peru

Scotiabank completed a C$390 million purchase of two banks in Peru in March to create the third-biggest bank in that country. The lender also owns Grupo Scotiabank, the sixth- largest bank in Mexico.

Interfin was founded in 1979 in San Jose, and owns Banco Interfin. Scotiabank has been in the Central American country since 1995, and the bank's board met there last month to discuss second-quarter results.

Corporacion Interfin had 2005 net income of 10.26 billion colons (U$20 million), an increase of 46 percent from a year earlier, according to a report on the company's Web site.

The transaction will add 3 cents a share to earnings after the first year, Dundee Securities analyst Susan Cohen wrote in a report to investors today. Scotiabank is expected to have earnings per share before one-time items of C$3.73 in 2007, according to the average estimate of 11 analysts polled by Thomson Financial.