01 September 2007

Scotiabank to Buy Chile's Banco del Desarrollo

Business News Americas, 4 September 2007

Scotiabank sees Latin America as a key growth area where the group will continue expanding operations organically and through acquisitions, executive VP for Latin America Peter Cardinal told BNamericas.

While Mexico remains Scotiabank's largest Latin American earnings contributor, accounting for 15% of total net income for the 2006 fiscal year, the Toronto-based bank has been trying to increase revenue contribution from other countries in the region by purchases in Peru, Costa Rica, the Dominican Republic and an upcoming US$1bn takeover in Chile.

In the meantime, the Canadian firm is focusing on organic growth in Mexico, where its biggest Latin American banking unit Scotiabank Inverlat ranks sixth. BBVA and Citi hold the two top spots.

Retail-oriented Scotiabank Inverlat is adding 85 branches this year to end 2007 with some 590 in attempt to increase its 1.4mn client base.

Mortgage financing is one of the bank's key businesses in retail lending as it takes advantage of Mexico's young demographic profile.

"We are the leading bank in the mortgage market [as measured by new mortgage loans granted]," said Cardinal, who also heads Scotiabank's Mexican unit.

The bank granted 8,058 mortgages last year, increasing its mortgage loan book 33% to 23.3bn pesos (US$2.16bn).

The executive is positive about medium-term economic prospects for Central America, where Scotiabank ranks fourth in El Salvador, runs a medium-sized bank in Panama and is merging two banks in Costa Rica.

"[Central American] markets are undergoing a transformation and want to become part of the global economy... we think it's very positive," Cardinal said.

The Canadian bank is facing increasing competition from rivals like Citi and HSBC, which bought some of Central America's largest banking groups last year.

In Costa Rica, Scotiabank paid US$300mn for local financial group Interfin, which combined with its existing unit will take it to fourth spot from today's eighth.

"[The merger process] will be completed in early October," said Cardinal, who thinks Scotiabank's international presence gives the bank an advantage over the country's top players, state-run Banco Nacional and Banco de Costa Rica.

Scotiabank's international banking operations accounted for 29% of the group's total net income for the nine-month period ended July 31, when the overseas operations had Cd$65bn (US$61.0bn) in assets.
RBC Capital Markets, 31 August 2007

Scotiabank announced it has signed agreements to purchase 79% of Banco del Desarrollo, Chile's seventh largest bank for US$810 million. These agreements are the first stage in a plan to purchase up to 100 per cent of the bank for US$1.03 billion.

The transaction is consistent with the bank's strategy to expand in markets it already has a presence in, and should allow Scotiabank to achieve greater critical mass in a country where its market presence was small and its profitability below the leading banks.'

The 2.8x book value and 15x 2007 earnings multiples, based on the bank's 2007 expectations, are not particularly cheap for a Latin American acquisition, which reflects Chile's stability (investment grade status since 1992) and fast growing banking markets (20% CAGR in loans and deposits in the last 5 years), in spite of the banking market having fairly mature characteristics.

The bank believes that the transaction will add $0.05 to Year 1 EPS and $0.10 to Year 3 EPS, providing the bank with an expected return on invested capital of 13% by Year 3. Synergy assumptions appear conservative and the bank has a track record of delivering on acquisition promises in Latin America.

Cost synergies should come from traditional infrastructure and central function areas, but Scotiabank should also help lower wholesale funding costs due to its high rating. Revenue synergies are also possible from a cross-selling standpoint, but those are not included in management's estimates.

Scotiabank had only 2.5% market share in loans and deposits in Chile, but following the close of the deal (expected in November 2007) it should reach 6.4% and 5.2%, respectively.

Scotiabank will remain well capitalized, in our view. This transaction is expected to lead to a 45 basis point decline in its tangible common equity ratio (currently a healthy 7.6%).

We believe further acquisitions are likely, particularly in Latin America and Asia. Investments in Asia would likely be smaller than in Latin America as the bank is still building its presence in that area, and the bank has historically initially entered new countries via small deals.
Financial Post, Grant Surridge, 1 September 2007

After weeks of speculation, the Bank of Nova Scotia finally lodged a US$810-million bid yesterday to purchase 79% of Banco del Desarrollo, the seventh-largest bank in Chile.

Rumours of the deal surfaced at the beginning of August, when local newspapers reported the Canadian banking giant was on the verge of making a US$450-million offer for about 40% of the Chilean bank.

"Where there's multiple share-holdings, you've got to figure out how to get them all on line," said Scotia's executive vice-president of international banking, Rob Pitfield.

He said Scotia originally held talks with Sociedad de Inversiones Norte Sur SA, a Chilean investment firm that holds 39% of Banco del Desarrollo, but secured a 24% stake from France's Credit Agricole SA and a 16% stake from the Italian bank Intesa Sanpaolo SPA before yesterday's announcement.

It was always Scotia's intention to purchase the entire bank, he said, a deal worth just over US$1-billion the bank hopes to complete by the end of the year.

If the deal goes through, it would catapult Scotia to sixth position in the Chilean bank pecking order.

With total assets of more than US$5.1-billion, Banco del Desarrollo has 74 branches in Chile, while Scotia's Chilean subsidiary, Scotiabank Sud Americano, has assets of US$3.5-billion and 57 branches. Scotia intends to maintain the two separate brands, because they target different market segments.

"I'm glad to see they are using capital to grow along the lines they promised shareholders they would," said Juliette John, who manages the $980-million Bissett Dividend Income Fund and holds Scotia shares. She said Canada is a low-growth market, and that Scotia's strategy of diversifying to regions with lower banking penetration should pay off in the long term.

Scotia's overseas operations accounted for about 27% of its overall earnings in third-quarter results reported this week.

Scotia has expanded more aggressively in Latin and South America than its Canadian peers, with operations in Peru, Mexico and Costa Rica, among others.

Other Canadian banks have focused on "low-hanging fruit" in the United States rather than look for more challenging opportunities abroad, said Jacob Jegher, an analyst with the research and consulting firm Celent, which does work for Canadian banks.

He said a mature market at home and the fact domestic banks are prevented from merging leaves no choice now but to look abroad.

"You have to seek opportunities elsewhere to grow your business," he said.

In 2002, the bank wrote off a US$500-million investment and retreated from Argentina when that country's economy collapsed.

But Scotia is confident that Latin America is an increasingly stable and affluent market, and that past problems served as a learning experience.

"Argentina also showed us the dangers of being too small," Mr. Pitfield said. "If we were a bigger and more powerful bank, it's harder to suffer as much as we did.
The Globe and Mail, Tara Perkins, 1 September 2007

Bank of Nova Scotia plans to keep two separate brands in Chile, after it pulls off its $1.03-billion (U.S.) acquisition of Banco del Desarrollo.

Scotiabank's current venture in Chile, Scotiabank Sud Americano, has 57 branches that deal in everything from consumer banking to wealth management, corporate and investment banking, commercial lending and insurance.

Banco del Desarrollo, on the other hand, was founded with a mission to support the community and social development, and its key strengths include small business and micro lending, and consumer finance.

The addition of these 74 branches and 24 business centres to Scotiabank's current Chilean operations will vault Canada's most international bank into the big leagues of Chilean banking, making it the sixth-biggest bank in the country.

But Scotiabank executives expect to maintain two distinct brands to maintain their ability to deal with different ends of the population.

Banco del Desarrollo's branches are more relaxed, smaller, more like outlets than branches, said Rob Pitfield, Scotiabank's executive vice-president of international banking.

It focuses on the segment of the market that generally has between $5,000 and $12,000 of household income a year. That represents about 55 per cent of the market, Scotiabank said.

"You know, you don't want to be presenting yourself to a number of these customers in shirts and ties and suits and things like that," Mr. Pitfield said in an interview yesterday. "You want to have more of a relaxed look, like casual golf shirts, slacks ... Lots of external sales force type things, with people who just work the neighbourhood."

Then the question is, "if you've got that kind of different look and feel, do you need then a different brand to go along with that, or a subbrand to go along with that? So, we're working our way through that now, not only in Chile, but in all the other places. And usually, it's a combination. Sometimes it's a subbrand of a main brand, sometimes it's a different brand altogether."

Scotiabank said yesterday that it has reached agreements with three major institutions that own shares of Banco del Desarrollo to buy a 79-per-cent stake in the bank for $810-million.

Scotiabank hopes to buy the remaining stake through a public share acquisition, bringing the total price tag to about $1.03-billion.

But Scotiabank has 20 days to do its due diligence, and has struck a deal that leaves it some room to lower the price if it doesn't like what it sees. The final deal also requires regulatory approval, and is not expected to be complete for a number of months.

The negotiations for this deal began before Christmas, Mr. Pitfield said.

International deals often take time. After months of rumours in the press, Scotiabank disclosed in March that it was in talks to buy a minority stake in Bank of Dalian Co. Ltd., China's seventh-largest city commercial bank.

Yesterday, Mr. Pitfield said "we're continuing to see if there's an opportunity to work with Dalian."

"In China, it works the way China wants it to work, and along the timelines that China wants it to work," he added. "These are very new deals for China, and all of these city banks do their own deal. And so, they have to become familiar with the way the documentation and the structures [work], all these things. They have nothing really to relate [it] to, so it takes time."
Business News Americas, 31 August 2007

Scotiabank has agreed to buy Chile's seventh largest bank Banco del Desarrollo for some US$1.03bn in a deal that will take Scotiabank to sixth spot from today's 11th.

The Toronto-based group said on Friday it agreed to pay US$810mn for 79% of Banco del Desarrollo, a stake that will be bought from Chilean investment firm Sociedad de Inversiones Norte Sur (39%), France's Credit Agricole (24%) and Italian bank Intesa Sanpaolo (16%).

After conducting due diligence, which will start next week, Scotiabank will be launching a tender offer for all the bank's shares, executives from local unit Scotiabank Sudamericano and Banco del Desarrollo told reporters in Santiago.

The agreements include provisions to adjust the price based on due diligence.

"This [the sale of the bank] was not an easy decision," said Inversiones Norte Sur chairman Vicente Caruz, adding Scotiabank's commitment to maintain Banco del Desarrollo's mission was key in the decision making process.

The Chilean bank was founded to promote social development by providing banking services to SMEs and low-income earners.

Scotiabank's purchase comes 17 years after it first entered Chile, where it now controls a 2.5% loan market share, and at a time when the Canadian bank has been expanding in the region through acquisitions.

"This enables us to increase our presence in Chile, one of Latin America's most developed markets... the highest rated country in the region," said Peter Cardinal, head of Scotiabank's Latin American operations.

Given the complementary nature of the two operations, most of the staff are expected to keep their jobs, said Scotiabank Sudamericano CEO James Callahan, who did not rule out layoffs.

Cardinal said no decision has been made whether to merge and rebrand Banco del Desarrollo under the Scotiabank name.

In Peru and Costa Rica, where Scotiabank bought local banks last year, the group rebranded its acquisitions under the Scotiabank name.

Banco del Desarrollo has assets of US$5.1bn and a network of 74 branches, while Scotiabank Sudamericano has US$3.5bn in assets and 57 branches.

The purchase is expected to close before the end of this year.
Financial Post, Jonathan Ratner, 31 August 2007

Bank of Nova Scotia’s move to buy a 79% stake in Chile’s Banco del Desarrollo for US$810-million, signals its continued interest in bulking up both in Chile and throughout Latin America.

The bank has US$5.1-billion in assets and 74 branches, which will boost Scotiabank’s international segment by between 6% to 8%, Dundee Securities analyst John Aiken told clients in a note.

He views the acquisition and BNS’s international expansion “very positively,” saying with $1.5-billion to $2.7-billion in excess capital estimated at the end of the third quarter, Scotiabank should be able to absorb the purchase easily.

However, he pointed to two items in the bank’s press release that raised concerns.

"What synergies are available to BNS, if there does not appear to be significant overlap in the businesses?"

"Who buys a bank on the Friday before a long weekend?"
Dow Jones Newswires, David Pearson, 31 August 2007

Credit Agricole SA one of France's leading financial institutions, said Friday it is tendering its 23.7% stake in Chilean bank Banco del Desarrollo to Nova Scotia, a Canadian concern that has launched a bid to acquire full control of the Chilean bank.

Credit Agricole said the decision to tender its shares to Nova Scotia is contingent on no more favorable counteroffers being made by another buyer.
Bloomberg, Sean B. Pasternak & Edgar Ortega, 31 August 2007

Bank of Nova Scotia, Canada's second- largest bank, plans to acquire Chile's Banco del Desarrollo for about $1.03 billion to more than double its business in the South American nation.

Scotiabank agreed to buy 79 percent of the Chilean lender from three investors for $810 million, and plans to make a public offer for the rest of the shares on similar terms, the Toronto- based bank said in a statement today. It will be the biggest takeover in Scotiabank's 175-year history.

The acquisition of Chile's seventh-largest lender will more than double Scotiabank's branches in the country, boosting assets by almost 150 percent. Chief Executive Officer Richard Waugh has spent about $1 billion over the past 17 months on purchases in countries including Puerto Rico, Thailand and Jamaica.

``We have a small franchise down there, but it needed to be bigger,'' Rob Pitfield, the bank's executive vice-president of international banking, said today in an interview. Chile is ``still a population that has plenty of banking requirements and needs.''

The transaction will make Scotiabank Chile's sixth-largest bank, with 131 branches and a total of $8.6 billion in assets. Scotiabank first entered the country in 1990, when it bought a stake in Banco Sud Americano.

The bank is buying 39 percent of Banco del Desarrollo from Chilean investment firm Sociedad de Inversiones Norte Sur SA, 24 percent from Credit Agricole SA, Europe's largest mutual-fund manager, and 16 percent from Intesa Sanpaolo SpA. The transaction is expected to close in November.

Chief Financial Officer Luc Vanneste told investors on a conference call that the purchase will add about C$47 million ($44 million) to earnings in the first year, and C$100 million by the third year. Scotiabank will have about 6.9 percent of Chile's $20 billion mortgage market after the transaction and 11 percent of the $9 billion small business market.

``We view the acquisition and Bank of Nova Scotia's overall expansion in its international segment very positively,'' said John Aiken, an analyst at Dundee Securities Corp. in Toronto. The bank has up to C$2.7 billion in excess cash, the analyst said today in a note.

Scotiabank has been making acquisitions to reduce its reliance on Mexico in its foreign earnings. Mexico accounted for 41 percent of international profit in the first half of 2007, down from 52 percent a year earlier, Merrill Lynch & Co. analyst Sumit Malhotra wrote in a note.

Scotiabank reported Aug. 28 that international bank profit fell for the first time in more two years, declining 3.4 percent to C$276 million. International banking accounted for about a quarter of the bank's C$1.03 billion profit for the three months ended July 31.

Pitfield said today the bank would look at acquisitions in other areas where it doesn't have a large presence, including Panama.

Scotiabank shares rose C$1.07, or 2.1 percent, to C$52.24 at 4:10 p.m. in trading on the Toronto Stock Exchange. The stock has climbed less than one percent this year, compared with a 1.6 percent decline among the nine-member Standard & Poor's/Toronto Stock Exchange Banks Index.
Dow Jones Newswires, Monica Gutschi, 29 August 2007

Bank of Nova Scotia says Chile's Banco del Desarrollo would give it the scale it needs to acquire critical mass in that country.

As reported, the Canadian bank has entered an exclusivity agreement with Chilean firm Inversiones Norte Sur related to discussions on its shareholding in Banco del Desarrollo.

Bank of Nova Scotia's head of International Banking, Robert Pitfield, said Tuesday that Banco del Desarollo was strong in commercial and near-prime lending, two areas the Canadian bank needs to beef up.

He also said the bank would add the scale and return on equity that Bank of Nova Scotia looks for in an acquisition. He also noted that Chile is an investment-grade country.

Pitfield said talks are continuing.

Banco del Desarrollo is controlled by Inversiones Norte Sur, in which the Catholic Church has a stake. Other minority shareholders include France's Credit Agricole, Italy's San Paolo IMI and the Dutch Oikocredit EDCS.
• 10 August 2007 Scotiabank to Negotiate Exclusively with Banco del Desarrollo

• 9 August 2007 Scotiabank's Rumoured Interest in Chile's Banco del Desarrollo;