Scotiabank’s Waugh Sees Asia Driving Growth

Bank of Nova Scotia’s Richard Waugh, who is stepping down next week after 43 years at Canada’s third-largest lender, said future growth will probably be in Asia after decades of expansion in Latin America.

“There will be a greater focus in Asia,” said Waugh, 65, who is retiring Nov. 1 and relinquishing the chief executive officer role to President Brian Porter. “Southeast Asia has been, and will remain, attractive to us, both for size of markets and demographics, and because of some of our history there.”

Scotiabank’s international growth will more likely come from acquiring or building up businesses in Southeast Asia than in countries like Brazil, said Waugh, who started as a C$7,400-a-year teller in Manitoba. As CEO, he led the Toronto-based bank through the global financial crisis while adding assets in Latin America and Asia and expanding domestically with Canadian takeovers.

“A large part of Scotia’s success in expansion has been via acquisitions,” John Aiken, a Barclays Plc analyst in Toronto, said yesterday in an interview. “It’s a testament to Rick’s strategy and his ability to manage the bank and his team that investors are very comfortable with Scotia as an allocator of capital.”

Waugh’s legacy of deals include last year’s $1 billion purchase of a 51 percent stake in Colombia’s Banco Colpatria Red Multibanca Colpatria SA, the lender’s largest foreign purchase, and the C$3.1 billion ($3 billion) takeover of ING Groep NV’s Canadian operations in November.

‘Biggest Regret’

“We did 40 acquisitions, C$13 billion since the crisis -- that’s a pretty heavy workload for everybody that had to do it,” Waugh said in an Oct. 22 interview at the bank’s headquarters.

“My biggest regret is we did that at a time when the economies were not growing at optimum,” Waugh said, adding that he would have loved a year or two of normal economic growth to show that the businesses could really take off. “It would have been nice to have the wind at your back than having all these headwinds.”

During Waugh’s 10-year tenure as CEO, Scotiabank had an average annual return of 11 percent and a total return of about 185 percent. The lender outperformed Canada’s benchmark Standard & Poor’s/TSX Composite Index during the period, while lagging behind Royal Bank of Canada’s 222 percent return and the 217 percent gain of Toronto-Dominion Bank. Scotiabank was little changed at C$62.10 at 4 p.m. in Toronto.

Winnipeg Teller

Waugh more than doubled assets and profits during his term. When he took over in December 2003, Scotiabank had total assets of C$281.5 billion and had just come off a year with annual profit of C$2.48 billion. The bank now has C$742.6 billion of total assets, and had C$5 billion profit for the first three quarters of this year ending Oct. 31. Net income for fiscal 2012 was C$6.47 billion, financial statements show.

“Rick accomplished a whole host of objectives that he set out for himself,” Aiken said. “I don’t think you’d get any argument that Rick has been very successful in his stewardship.”

Waugh began his Scotiabank career in 1970 as a branch teller in Winnipeg. He rose through the ranks, taking on senior roles until becoming president in January 2003 and then CEO on Dec. 2, 2003. His total compensation last year was C$11.1 million.

File Closed

When Waugh took over from former CEO Peter Godsoe, Scotiabank had just shelved plans to spend as much as C$3 billion on U.S. retail bank acquisitions after deeming the assets too expensive. Scotiabank and Bank of Montreal ended merger talks in 2002 because of the government’s continued opposition to domestic bank mergers, the Globe and Mail reported at the time. Waugh, who wouldn’t say if the two banks talked, said “there was a lot of sense in the merging of certain banks” and that Scotia was “seriously thinking about those possibilities.”

The collapse of Lehman Brothers Holdings Inc. in September 2008, which helped trigger the global financial crisis, and concerns about banks being “too big to fail” has ended any Canadian bank-merger discussion, said Waugh.

“While I think a case could be made, I think that post-Lehman that file is closed for a long, long time,” Waugh said.

Stricter Requirements

Waugh hands over control as banks around the world are being asked to bolster capital and meet stricter requirements from global regulators to reduce risk and avoid another financial crisis. Porter’s biggest challenge will be “sub-optimal economic growth,” said Waugh, who will remain on the bank’s board and take on the role of deputy chairman until Jan. 31.

“We’ve got all these operational costs, regulatory, etc., and we’ve got to manage the expense line,” said Waugh, who’s also a vice chairman of the Washington-based Institute of International Finance. “He’s still got a headwind on the growth, and that’s his challenge.”

Porter led the international banking business from 2010 until being named president last year. He was group head of risk and treasury from 2008 to 2010 and chief risk officer from 2006 to 2008.

“You shouldn’t expect a great deal of change,” Gavin Graham, chief strategy officer at Integris Pension Management Corp., said in a telephone interview. “Anybody who’s in senior management at Scotia for the last decade has been involved for the push to get international exposure up, especially in Latin America and Asia and also building their wealth-management business.”

Wealth Management

Waugh said he expects Scotiabank to benefit from diversification across four business areas -- Canadian banking, international banking, global wealth and insurance and its capital markets unit. He said one of his greatest accomplishments was building up Scotiabank’s wealth-management unit by buying the Canadian business of E*Trade Financial Corp. for $442 million in 2008 and spending C$2.3 billion for a 37 percent stake in Toronto-based money manager CI Financial Income Fund the same year, and later acquiring DundeeWealth Inc. in 2011.

“Ten years ago, wealth management as we define it was probably only three or four percent of our earnings, and yet it was very important,” Waugh said, noting that the business today represents almost 20 percent of profit. “That adds to diversification and adds meaning to what our customers and the demographics want.”

ING Canada

The ING Canada acquisition was another highlight for Waugh, after his initial reservations on the online banking platform with C$30 billion of deposits.

“When we got in there and looked at it, it really changed my mind,” Waugh said. “This is truly a game-changer for us.”

The operation falls within Canadian banking, Scotiabank’s most profitable business with a 36 percent return on equity this year.

International banking, Scotiabank’s business with the lowest returns, at 15 percent, still has lots of potential, he said. Scotiabank, with operations in more than 55 countries, gets more than a quarter of its annual profit from international banking.

“Emerging markets are not all the same,” Waugh said. “We’ve chosen emerging markets -- Peru, Chile, Mexico, Colombia, Thailand, Panama and others -- where the demographics, growth rates are performing well.”

Brazil is an area where Scotia is unlikely to expand, he said. Waugh tried three times in the 1990s to buy a bank in that country when he was head of international banking.

‘Opportunistic’ Acquisitions

“We got outbid on two and a third we just wouldn’t touch,” Waugh said. “Now, of course, the banks have become very, very big, so I don’t see us making a retail acquisition in Brazil because we’re not going to bet the bank on one country, no matter if it’s a good country or not.”

Scotiabank will focus on increasing profit from its existing operations rather than through takeovers, Waugh said, though the bank is keeping the door open for “opportunistic” acquisitions.

“Our focus is to do it without acquisitions, but if we’ve got the capital, the people and the resources, and the experience, if something comes up we’ll certainly take a look at it,” Waugh said.

Some opportunistic deals haven’t worked out for the Canadian lender in the past. Scotiabank withdrew its bid to buy a 20 percent stake in China’s Bank of Guangzhou in July after its Chinese partners re-evaluated the proposed partnership -- an outcome Waugh called “disappointing.”

Retirement Plans

“Despite the size of the country we’re still taking a measured approach,” Waugh said of China, noting that the firm did succeed in partnering with Bank of Beijing for wealth management in the country.

Waugh said a full-service bank with retail in Southeast Asia “would be attractive.” Scotiabank is “well on that road” in Thailand, he added, referring to the lender’s stake in Bangkok-based Thanachart Bank.

Waugh said he plans to be active with his not-for-profit family foundation and invest through his own private advisory company after retiring. He offered his successor one piece of advice.

“Because I’ve taken so much equity over 20 years, I’m going to be a shareholder for a long, long time,” Waugh said. “The only thing I tell Brian is to keep the dividend coming, and he will.”

Before it's here, it's on the Bloomberg Terminal.