Friday, July 21, 2006

Scotiabank's Expansion Overseas

Financial Post, Duncan Mavin, 21 July 2006

Bank of Nova Scotia's international division has turned in stellar results of late, but the cost of integrating the bank's expansion overseas could hold back the performance of foreign units in the short-term, says Genuity Capital Markets analyst Mario Mendonca.

In May, Scotiabank's international operations reported earnings of $268-million in the second quarter of 2006, up a whopping 44% from $186-million a year earlier. Investors flocked to the bank's global strategy and Scotiabank's stock got a boost.

But if the cost of integrating and expanding foreign operations puts a dent in the results of the bank's international division in future quarters, short-term investors might not look so kindly on the bank's international division as they have in the past.

Already in 2006, Scotiabank has bought or agreed to buy banks in Peru, Costa Rica and the Dominican Republic. Meanwhile, Scotiabank Mexico has committed to growing market share from 6% to 10%, and on Wednesday, the head of strategy at Scotiabank Mexico was reported to have revealed plans to spend between US$150-million and US$200-million to open more than 300 new branches by the end of 2009.

"We believe the costs associated with growing [Scotiabank's] presence in Mexico (and in its international segment in general) will keep the growth rate of expenses at the top-end of the industry," said Mr. Mendonca.

In fact, said Mr. Mendonca, the strong performance of Scotiabank's competitors in Mexico -- such as Citigroup Inc.'s Banamex unit which reported 13% year-on-year revenue growth and 40% loan growth on Monday -- could put more pressure on the Canadian bank to keep pace and incur integration costs there sooner than planned.