Friday, February 23, 2007

Scotiabank in Puerto Rico

BNamericas, 23 February 2007

Canada's Scotiabank is mulling further investments to lift its share of the Puerto Rico market to 8-10%, the head of the local unit told BNamericas.

On February 16, Scotiabank bought a 10% stake in Puerto Rico's First BanCorp - parent of FirstBank - for some US$94mn. First Bancorp will issue about 9.25mn shares that Scotiabank will buy, a deal expected to close in two months after regulatory approvals are granted, Scotiabank de Puerto Rico president and CEO Bruce Bowen said.

"When they approached us we expressed interest and we think that given the price and where the market is right now it will be a good medium to long-term investment," he said.

"We are looking at many different opportunities. I do think there are other institutions and portfolios that over the next year or two could be very good opportunities."

Scotiabank has been active since 1910 in Puerto Rico, where it operates through 20 branches and commands a roughly 3% loan market share.

"With that level of market share, it is very difficult to get a proper return on equity in the long term and economies of scale from an efficiency standpoint to compete with banks that have 10% or more market shares," Bowen said.

First BanCorp would negotiate exclusively with Scotiabank if it starts a sale process or receives an offer from the Canadian bank within 18 months. It will also give Scotiabank a chance to respond in the event of a third-party takeover bid.

"There certainly is nothing in our agreement with them that has anything specific about any further investment. It would be pure speculation to anticipate what will happen, but anything can happen," Bowen said.

First BanCorp is one of several banks on the island that over the last 18 months have run into serious accounting problems, related to mortgage loans and consequently lost market share.

The bank still faces outstanding class-action lawsuits and has not yet filed its 2006 financial results. Analysts see these legal and regulatory issues posing an obstacle for Scotiabank buying the rest of First BanCorp.

Analysts believe the Puerto Rican banking sector is ripe for consolidation as the financial system suffers from a sluggish loan market due to an economy on the verge of a recession as well as an inverted yield curve.

Bowen said the banking system provides opportunities Scotiabank will take, as major players have become "distracted" over accounting woes.

The executive said Scotiabank de Puerto Rico has increased its market share in mortgage originations to slightly below 3% from 1% during the last 18 months.

San Juan-based First BanCorp is the second-largest financial holding company in the commonwealth and the 59th largest bank holding company in the US, with total assets of US$17.4bn as of end-September, 2006, and 139 branches.
The Globe and Mail, Andrew Willis, 23 February 2007

At first blush, Rick Waugh's latest foreign venture looked totally out of character for Bank of Nova Scotia.

A Canadian bank that wins praise for centralized management and tight control of operations dropped $94-million (U.S.) last week for a 10-per-cent stake in Puerto Rico's second-largest financial institution, First Bancorp. The cash doesn't even buy Mr. Waugh a seat at the table at what has been a troubled company: Scotiabank is simply a "non-voting observer" at the Puerto Rican bank's board meetings.

Why dip a toe in Caribbean waters, and take a tiny stake, when Scotiabank has more than enough firepower to take over First Bancorp?

To explain his strategic thinking, Mr. Waugh points to the long overseas experience of Canada's most international bank, which will celebrate its 175th birthday in March.

"Our preference is always to have control. But our approach is always to respect local owners and local regulations," said Mr. Waugh, a native of Manitoba who has climbed every corporate rung since taking a job at the Winnipeg branch in 1970. Then he starts into a quick history lesson.

Few of the deals done by Mr. Waugh and his predecessors happened quickly. Scotiabank was in Peru for decades with a minority stake in a privately owned bank. As both sides grew comfortable with one another, the stake grew.

Three years ago, an Italian bank decided to sell its Peruvian operation. Scotiabank was the only rival invited to bid, and with its local partner, was able to take over the entire operation for $390-million in 2005. It took decades, but Scotiabank now owns the No. 3 bank in Peru.

The same tactics — take an ownership toehold and turn it into a stranglehold over time — have played out in Costa Rica, the Caribbean and most importantly in Mexico, where Scotiabank now earns more than $400-million a year after simply breaking even and weathering crisis after crisis in the 1980s and early 1990s.

So while domestic rivals such as Toronto-Dominion Bank and Royal Bank of Canada are picking off regional U.S. retail banks, vying for the deals against some of the largest financial players on the planet, Scotiabank is continuing to work its Caribbean, Central and South American trap lines.

"If you look at U.S. bank takeovers, they are almost always contested auctions, with some very serious players involved," Mr. Waugh said. "Our deal pipeline is as full as it's ever been, and we aren't involved in situations where we are in bake-offs against bigger banks."

Which brings us to Puerto Rico. Scotiabank has been on the island for 97 years and has 600 employees, 23 branches and five mortgage centres, catering to both upper- and middle-class retail clients and the business community. As a result of the heft of its Canadian parent, which has $5-billion more capital than regulators say it needs, the local bank is one of the strongest in the region.

Crosstown rival First Bancorp spent the past two years coping with a weak balance sheet, management turnover and shareholder lawsuits. The hole in the balance sheet, now filled by Scotiabank's investment, stemmed largely from mortgage-based ventures that featured partners who did not hold up their end of deals with First Bancorp. The other problems flowed from those capital issues.

Scotiabank couldn't do a friendly takeover in Puerto Rico because the First Bancorp board wasn't willing to sell at what it saw as a fire-sale price. Mr. Waugh's arrival buys First Bancorp time to fix what's busted. However, in exchange for its money, Scotiabank has negotiated all sorts of advantages for staging a takeover in the next 18 months.

Acquisitions and any other growth plans at Scotiabank must meet three key criteria: They have to create sustainable revenues, represent a productive use of capital for a bank that turned in an industry-leading 22-per-cent return on equity, and must never expose the bank to potential risks that could endanger the entire franchise. These broad standards give local managers, and Mr. Waugh, a fair degree of flexibility when it comes to doing deals.

Mr. Waugh has been CEO for just three years. At 59, he can look forward to up to six more years at the helm. Yet many of the seeds the CEO is planting, including the Puerto Rican investment, may not bear fruit on his watch. That's exactly the way Mr. Waugh wants to run the bank.

"We like to think we run a tight ship, and deliver consistently on a quarter-to-quarter basis," Mr. Waugh said. "But my job, and the board's job, is to think a decade ahead, and we do that consistently, too."