Scotia bank’s $2.4 billion war chest: More Latin America acquisitions?

Analysts Doug Young and Bradley Romain of Desjardins Capital Markets are keeping the Bank of Nova Scotia (BNS-TSX) on deposit as a “hold” with average risk and a 12-month price target of $72 a share. They write:

Having recently sold its stake in CI Financial Corp. (CIX-TSX) for $2.4 billion, Scotia, to paraphrase its own advertising slogan, is richer than it thinks.

Equally applicable is “forward banking,” the tag put out by Tangerine, the on-line bank formerly known as ING Direct which Scotia bought in December, 2012.

After announcing in mid-May that it would sell its stake in CI Financial, Scotiabank acted quickly, announcing a bought deal secondary offering for the bulk of its stake by the end of that month.

The secondary offering, which closed in mid-June, saw 82.8 million shares sold, as well as the exercise of the full over-allotment.

Although the deal gave Scotia $2.4 billion, it resulted in gross proceeds of $2.62 billion.

If Scotia doesn’t put the $2.4 billion to work, its net earnings per share will be diluted. But we think the bank won’t rest on its laurels.

Indeed, Scotia is likely to use the proceeds to make acquisitions in wealth management, as well as personal and commercial banking, in Mexico, Colombia, Peru and Chile.

The bank could also expand its credit card business both in Canada and internationally.

Scotia’s purchase in mid-June of a 51 per cent stake in Chile’s Cencosud S.A. for $300 million is a prime example of the deals we believe Scotia will pursue in South America.

Cencosud, a retail conglomerate including financial services, boasts 2.5 million credit card users.

Although we believe Scotia could give shareholders a decent return over the next year, we note that’s it only likely to give a 5.2 per cent return to our price target. Hence, our “hold” recommendation.

But we do admit that Scotia offers faster potential growth, thanks to its global footprint in both banking and wealth management — particularly in Mexico, Colombia, Peru and Chile.

Scotia’s acquisition of what was ING Direct provides yet another avenue for growth, as does its recently announced partnership with Canadian Tire Corp. Ltd. (CTC-TSX).

Under the deal, Scotia will buy a 20 per cent stake in Canadian Tire’s financial services business for $500 million.

Scotia will also provide Canadian Tire with up to $2.3 billion in credit card receivable financing.

But Scotia’s international exposure comes with higher risks. And although its exposure to Thailand is small, that country has recently been roiled by civil unrest. Moreover, the bank has a big exposure to the Caribbean — a region now suffering tough economic times.

Headquartered in Toronto, Scotia is one of Canada’s big-five banks, offering a full range of services including wealth management, brokerage, along with both personal and commercial banking.

 

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846