Scotia's LATAM operations likely to see changes with new CEO in town

The bank has invested heavily in Latin America but the returns have been sub-par

TORONTO, ON - NOVEMBER 4: Exterior and detailed pics of Nova Scotia Bank  and the Scotiabank tower on King St near Bay St   in Toronto on  November 4, 2014 Vince Talotta/Toronto Star        (Vince Talotta/Toronto Star via Getty Images)
The Scotiabank tower on King St near Bay St in Toronto on November 4, 2014 Vince Talotta/Toronto Star (Vince Talotta/Toronto Star via Getty Images)

The new head of Bank of Nova Scotia (BNS.TO) (BNS) is voicing his disappointment with the performance of the company's Latin American operations, opening up speculation about whether the bank could scale back investment, or even sell a portion of its assets, in the region.

"With BNS indicating a desire to further de-risk its international footprint, we believe that a sale of its higher-risk Colombia and Peru businesses could be a good strategic option," Mike Rizvanovic, director of financial services at KBW, wrote in a Feb. 2 note to clients.

While company management has indicated that a sale of any Latin assets is low on the priority list, Rizvanovic isn't completely convinced because investor pressure for change is mounting.

Scotia has invested heavily in Latin America and its large international exposure is one of the main differentiators from the other Canadian banks. While emerging markets can present bigger opportunities for super-charged growth, its operations in the region have underperformed.

"While we've allocated significant capital to our international bank in the last few years, the returns are not commensurate with our expectations in certain countries," Scott Thomson said on the company's first-quarter earnings conference call on Tuesday.

Thomson, the former CEO of Finning International, officially took the helm at Scotiabank on Feb. 1. Leading up to this appointment, he sat on the board of directors.

"We're in the process of assessing our international business mix so that going forward, we allocate our capital to customer segments where we can get appropriate returns for our shareholders," he said on the call.

Thomson identified commercial lending and wealthy clientele as areas where the bank is lagging in the region.

The challenges in its Latin operations have been a factor in the underperformance of Scotia's share price compared to its peers.

Should the company opt to exit certain countries, Rizvanovic estimates it could have a roughly four-per-cent drag on earnings in the near term but improve the lender's risk/reward profile over time.

Improvements necessary to get better sale price

Lorne Steinberg, president of Lorne Steinberg Wealth Management and whose firm owns Scotia, doesn't think a sale is on the table at this point, mainly because the assets are struggling and the bank wouldn't "want to sell this in a fire sale."

"I would be surprised if they exited any of those countries at the present time," he told Yahoo Finance Canada.

"These operations are suffering. At the very least, you'd expect to see them try and fix them up, improve profitability and then put them up for sale."

He notes the financial performance of Colombia, Chile and Peru has been particularly weak for the company. He also says if the bank were to conduct a sale, the buyer would likely be a local or foreign player that already has exposure to the region.

Rather than a sale, Steinberg thinks the bank will scale back investment in Latin America.

"In terms of capital allocation, if they don't see opportunity for sustained profitability, they'll be de-emphasizing some of those places," he said.

"They need to leverage their management knowledge and expertise, but really narrow down their focus on where they want to spend each additional dollar."

Thomson has said he's aiming to release his overall strategic plan for the bank by the end of its fiscal year in October.

Meanwhile, Michael Sprung, president of Sprung Investment Management, says a writedown on the Latin operations could be on the cards.

"The political fortunes of the region have shifted to the left such that those payoffs may well be further down the road. Given the resources present in the region, global demand for the development of those resources will require major investment," said Sprung.

His firm is a Scotia shareholder.

"I'm not surprised that BNS may take the position today that they should take some charges against the investments to date to reflect the longer-term timeline for realizing greater returns further down the road, given this environment of political uncertainty and higher interest rates."

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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