Friday, April 06, 2007

Scotiabank Setting Framework for Asian Expansion

The Globe and Mail, Tara Perkins, 6 April 2007

Bank of Nova Scotia is setting the framework for its eastern expansion and bracing for a rockier trip than its one down south.

Canada's third-biggest bank has been in aggressive acquisition mode for a few years now, but most of its muscle was put to use closer to home in Mexico, Central America and the Caribbean, said Rob Pitfield, executive vice-president of international banking.

“We had small franchises in many of those locations that needed to be built out,” he said in an interview in his office, where he was organizing himself after a recent trip to Thailand. “Our first and foremost strategy was to become a strong hemispheric bank.”

Having achieved an impressive size on this side of the world, the bank is turning its sights eastward, where it will proceed with bite-sized investments.

“Buying in Asia is harder,” Mr. Pitfield said. “We don't have the established presence that we do in the Caribbean and the Western Hemisphere.”

In addition to that, it's hard to find good personal and commercial banking “deals that are of any size, because the competition is so huge right now, and there's not a whole lot for sale.”

The bank's strategy is to make acquisitions that are “very chewable,” or of a size the bank can handle from both a management perspective and a financial perspective. “So, if anything were to go wrong with one of them, in and of itself, it wouldn't be too punitive if the whole thing were to collapse.”

Scotiabank is currently negotiating to buy a minority stake in China's Bank of Dalian Co. Ltd. And, in the past two weeks, it has signed a deal to buy a chunk of the eighth-biggest bank in Thailand, opened four new branches in Malaysia and launched a representative office in Turkey, which it sees as a gateway to Europe, Asia, the Middle East and Africa. “What we're trying to do is put more than little seeds in the ground, literally stakes in the ground, which can grow to be meaningful entities.”

Opportunities must be seized. “You know that these banks are not going to sit there,” he said of the targets in Thailand and China.

“These are serious banks that are going to grow two, three, four, five years out. Are they going to do deals with other banks? Probably,” Mr. Pitfield said.

The Thailand purchase is an example of how Scotiabank is looking to invest in banks that it believes are poised to grow domestically through merger and acquisition deals, as the banking sectors in many Asian countries consolidate.

Scotiabank is paying $240-million for a 24.99-per-cent stake in Thanachart Bank, which is already the leading automobile lender in Thailand and is building a presence in other traditional bank product areas. Scotiabank is seeking permission from local authorities to bring its stake to up to 49 per cent.

“If the opportunity ever came along where the regulators permitted foreign banks to acquire more than 50 per cent, that's definitely something we would look at,” Mr. Pitfield said.

“If that bank, in the meantime, were to look at another bank in Thailand and possibly do a merger or acquisition, hopefully we would have the right to go up to 25 per cent in that merged entity. That kind of amalgamation partnership, with whatever entity the bank chose to consolidate with in Thailand, would be a real strength. It would be a very dominant financial institution in Thailand.”

And Scotiabank's investment in that mega-bank would help to boost its profile in the region, making future acquisitions easier. The more Scotiabank gets to know a market and its politicians, regulators and economics, the better, Mr. Pitfield said.

Scotiabank is learning about the Thai market, where the process for car loans is more “manual” and relationship-oriented than in Canada.

A recent analyst note by Tisco Research said: “A slowing economy and the uncertain political outlook are likely to make 2007 another tough year for the Thai auto industry,” but the long-term outlook is positive and domestic car sales are on the rise as concern over the security situation in Bangkok has decreased.

Mr. Pitfield brushes off worries about Thailand's political stability. The bank is salivating over the upwardly mobile young people in a population roughly double the size of Canada's.

Ditto for Malaysia. “Malaysia, for us, is exactly the same kind of market as Thailand — good potential, good population, good economics, good future for the country,” Mr. Pitfield said.

“And we're hoping as they act out their master plan for financial services companies that foreigners will be allowed increasingly to bank in Malaysia.”

Scotiabank has reached its current allowable limits for growth in Malaysia, where it was able to open four branches recently as long as one was in an urban area, two suburban, and the fourth rural, Scotiabank spokeswoman Krista Pawley said.

Mr. Pitfield doesn't know how long it will be before Scotiabank has a hefty presence in Asia.

“Realistically, it will probably be longer, because they are bigger countries, they are very established in their own right, very worthy competitors, and we're very new from a retail perspective in these markets,” he said.

“Having said that, one of the things I've found about having a network like this is it's impossible to know. You don't know what partner is out there that you could identify who could completely transform your presence in that market.”
Reuters, 5 April 2007

Bank of Nova Scotia is open to talks to buy a stake in Malaysia's fourth-largest lender, RHB Bank, if such a move suits its strategy, a Scotiabank executive said yesterday. "We are always interested in opportunities to expand our presence, especially in a market like Malaysia. If it aligns with our bank's strategy, we are open to discussion," said Michele Kwok, senior vice-president for Asia Pacific, when asked if Scotiabank would be interested in a stake in RHB. A stake in RHB Bank will be soon be up for grabs after the state pension fund made a successful US$3.68-billion bid for parent companies RHB Capital and Rashid Hussain last month. The fund has said it wants to find a strategic equity partner for RHB and that it will sell down to about 35%. Ms. Kwok spoke to reporters after opening a new Scotiabank branch outside Kuala Lumpur, one of four new outlets recently approved by Malaysia's central bank. The government keeps a tight rein on foreign banks, allowing them only a few new branches each year. Scotiabank, Canada's third-biggest bank by assets, now has just five branches in Malaysia after 14 years there.