Scotiabank Buys Colpatria in Biggest International Purchase

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Bank of Nova Scotia Chief Executive Officer Richard Waugh
Bank of Nova Scotia Chief Executive Officer Richard Waugh has spent more than 2.5 billion in the past five years on foreign acquisitions, including stakes in banks in Brazil and China. Photographer: Daniel Acker/Bloomberg

Bank of Nova Scotia, Canada’s third-largest bank, agreed to buy a 51 percent stake in Colombia’s Banco Colpatria Red Multibanca Colpatria SA for about $1 billion in its largest international takeover.

Scotiabank agreed to pay $500 million in cash and 10 million in common shares for the consumer bank, the Toronto-based lender said today in a statement.

“Colombia is very behind compared to developed countries, or Brazil and Chile,” said David Pelaez, a financial-industry analyst at Medellin-based brokerage Bolsa y Renta. “It can handle larger growth rates than other countries, which makes it attractive.”

Chief Executive Officer Richard Waugh has spent more than $2.5 billion in the past five years on acquisitions outside Canada, including stakes in banks in Brazil and China. International banking represented 27 percent of the lender’s C$1.29 billion in profit during the fiscal third quarter.

“The more we looked at Colombia, the more excited we got about the economic potential,” Brian Porter, Scotiabank’s group head of international banking, said today in a telephone interview. “This is not the Colombia of old, it’s a very, very different country.”

Colombia’s financial sector was slow to recover from a 1999 economic crisis as the government fought against guerrillas and drug traffickers, Pelaez said.

Fifth-Largest Bank

Private sector credit grew 27 percent in August from a year ago to 169 trillion pesos ($88.9 billion), according to the website of Colombia’s securities regulator.

Banco Colpatria, Colombia’s fifth-largest financial group, had revenue in 2010 of 939 billion pesos ($490 million), a 3 percent increase from a year earlier. Profit climbed 22 percent to 192 billion pesos in 2010, according to a May regulatory filing. Colpatria has assets of $6.2 billion and operates 175 branches. The Bogota-based bank is the second-biggest credit-card issuer in the country.

Scotiabank is paying for about half the purchase in shares to maintain its capital levels, which lag behind other Canadian lenders, said John Aiken, a bank analyst at Barclays Capital in Toronto.

Julie Dickson, Canada’s banking superintendent, has urged banks to conserve capital as they prepare for new Basel Committee on Banking Supervision standards.

“Obviously the vendor felt a high degree of comfort in taking shares in consideration,” Scotiabank’s Porter said. “They’re cognizant of our historic returns, both in terms of growing dividends and share appreciation over time.”

Capital Ratios

“What is notable in this case was that there was an issuance of shares as part of the deal,” said Aiken, in a note to clients.

Scotiabank Chief Financial Officer Luc Vanneste reiterated that the bank expects to have a Tier 1 capital ratio of 7 percent to 7.5 percent by the first quarter of 2013.

Scotiabank has the right to bid for the remaining 49 percent of Colpatria after seven years, Vanneste said on a conference call with analysts today.

Colpatria is headed by Eduardo Pacheco, also the chairman of Mineros SA, the country’s largest gold producer. His father and Colpatria founder Carlos Pacheco Devia died in April.

Pacheco Devia began the company in 1955 with a small firm that was later rolled into banking, insurance and construction and financing units. General Electric Co.’s finance unit agreed to sell back its 49.77 percent stake in Banco Colpatria to the Pacheco family’s Mercantil Colpatria in May for an undisclosed amount, according to a statement from GE Capital.

Changing Partners

“What Colpatria is doing is simply changing partners,” said Pelaez. “They’d be substituting General Electric for another bank, because they want to have that international alliance with a company that can invest in technology and help the bank grow.”

Pelaez said competition is high between foreign banks seeking acquisitions in Colombia as the top companies in the market, including Grupo Aval Acciones y Valores SA, Bancolombia SA and Banco Davivienda SA, aren’t for sale.

The deal with Scotiabank will put Colpatria in the “big leagues” of finance as it pursues an expansion plan in Latin America, said Luis Santiago Perdomo, president of Banco Colpatria.

“Given Scotiabank’s size, it’s a strategic alliance that will allow us to evaluate purchases for growth,” Perdomo said by phone from Bogota.

He said the company’s shareholders have no plans to sell their remaining 49 percent of shares or fire any of the bank’s 3,900 employees.

50 Countries

Scotiabank made its first acquisition in Colombia in July 2010 when it bought an investment-banking business from Royal Bank of Scotland Group Plc.

Scotiabank, which has units in 50 countries including Mexico, Thailand and Peru, had identified Colombia as a region for potential Latin American expansion.

Latin America’s fourth-largest economy, worth $289 billion, is expected to expand by 4.7 percent in 2011-12, the Canadian bank said. The population of 45 million is higher than Canada and is the third largest in the region.

Scotiabank fell 6 cents to C$51.67 at the close of trading on the Toronto Stock Exchange.

The Colpatria investment is the second-biggest purchase by a Canadian bank of a lender in Latin America and the Caribbean in the past decade, after Royal Bank of Canada’s 2007 takeover of RBTT Financial Holdings Ltd. in Trinidad & Tobago for $2.19 billion, according to data compiled by Bloomberg.

Bank of Nova Scotia’s biggest purchase abroad before Colpatria was the $810 million takeover of Banco del Desarrollo of Chile in 2007.

UBS AG is advising Banco Colpatria’s parent, Mercantil Colpatria, on the transaction, and Simpson Thacher & Bartlett is the legal adviser. MBA Lazard is advising Scotiabank.

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