Canada’s third-largest bank expects to add to a C$3 billion ($3 billion) micro-loan portfolio with credit to consumers and small businesses ranging from $300 to $3,000. The bank will target clients in the 240 Mexico branches it acquired last year from Citigroup Inc. (C)’s Banamex unit.
Half of Mexico’s population earns $1,000 or less a month and Scotiabank could “easily” see a 15 to 20 percent compounded annual growth rate in the segment, said Wendy Hannam, executive vice president of Latin America.
“It’s a source of future retail customers for us, and a profitable business,” Hannam said in a Jan. 14 interview at the bank’s headquarters in Toronto. “We’re very comfortable with it within the risk appetite framework we’ve set out.”
Scotiabank, which will hold investor days in Bogota and Lima on Jan. 21 and 22, entered the consumer finance and micro- lending markets in Peru about five years ago through the acquisitions of Banco Wiese Sudameris and Banco Sudamericano. Scotiabank has since expanded the plan to Chile and other countries with a portfolio valued at about C$3 billion in the fiscal year ended Oct. 31.
The bank plans to increase consumer finance and microlending in other countries where it already has operations, including Peru, Chile, Colombia, Jamaica, Uruguay and the Dominican Republic, Hannam said. The new segment will be based in Lima.
In addition to having double the profitability of the typical domestic loan, the business also carries double the loan losses, Hannam said. Most loans are to be repaid in eight to 10 months, with a maximum term of two years.
“The same risk management that we put into all of our businesses goes into this business as well,” said Hannam, who has been with the bank since 1983 and was named to the Latin America post last month. “We’ve also set within our risk appetite framework thresholds for this business, so we don’t see it growing past 10 to 15 percent of our total retail assets.”
The bank’s international loan book “has historically been tilted towards business borrowers,” Sumit Malhotra, an analyst at Macquarie Capital Markets in Toronto, said in an e-mail on Jan. 16. “Given the favorable demographics and relatively under-banked status of consumer finance borrowers in Scotia’s target markets, focusing on this segment offers a higher- yielding option from which to grow retail.” Malhotra has an outperform rating on the stock.
Scotiabank rose 11 percent in the 12 months through yesterday, in line with the gain on the 10-member Standard & Poor’s/TSX Banks Index (STBANKX) and ahead of the 3.6 percent advance in the benchmark Toronto gauge. The shares climbed 0.8 percent to C$57.86 in trading today on the Toronto Stock Exchange.
Scotiabank has about C$40 billion in retail loans at its international segment, Hannam said. The unit had profit of C$1.73 billion last fiscal year, an 18 percent increase from the year earlier. It generated more than a quarter of the bank’s record profit of C$6.47 billion last year.
Scotiabank will distribute loans in Mexico through its Credito Familiar locations, through branches of businesses that the lender has acquired and so-called ‘bank at work’ programs, where employers allow the bank to offer services to employees.
“As people move up in the income segment, they become customers of our traditional retail branch channels,” Hannam said. “As they acquire homes, they’re mortgage customers, they’re car-loan customers, they’re credit-card customers, deposit customers.”
The bank has more than 8,000 employees for the consumer finance and micro-financing segment in Latin America and the Caribbean, representing almost 10 percent of its staff. “All of these countries have growing populations and growing middle classes,” Hannam said, referring to Latin America. “To have a footprint where the GDP growth is averaging 5, 6 percent is really great, and all of these countries building their domestic economies.”
Under Chief Executive Officer Richard Waugh, the bank has spent more than C$3 billion on foreign acquisitions in the last five years. The pace of such deals will slow, with the bank focusing on organic growth abroad, President Brian Porter said in November.
One country that Hannam won’t be as focused on initially for consumer banking is Brazil, where Scotiabank purchased wholesale lender Dresdner Bank Brasil SA in 2010.
“Brazil, for us, is only a wholesale operation right now,” said Hannam. “We don’t see big P&C acquisitions there. There are extremely large banks there.”
To contact the reporter on this story: Sean B. Pasternak in Toronto at firstname.lastname@example.org
To contact the editor responsible for this story: David Scheer at email@example.com