Scotiabank Lags Peers as Latin America Markets Drag

Bank of Nova Scotia, which has touted Latin America as an engine for growth, has lagged its Canadian peers over the past two years as sentiment soured on emerging markets.

Scotiabank, the only Canadian bank with significant operations in Latin America, has trailed its four domestic competitors as the MSCI Emerging Markets Latin America Index dropped 21 percent since April 2012. Scotiabank rose 19 percent in the two years through today while the Standard & Poor’s/TSX Composite Commercial Banks index gained 25 percent.

“Sometimes markets overreact or they overshoot,” Scotiabank Chief Executive Officer Brian Porter said in an April 8 interview. “We’ve seen this before and it’ll probably happen again. Markets come and go.”

Latin America is a key part of Scotiabank’s international banking operations. Porter, who took over as head of Canada’s third-largest lender by assets on Nov. 1, identified Mexico, Peru, Chile and Colombia as offering the greatest growth opportunities outside Canada in a March 5 interview at Bloomberg’s New York headquarters.

The relationship between the Latin America index and Scotiabank is “very strong,” said Bob Decker, a fund manager at Aurion Capital Market in Toronto. “But we’re off trend pretty strongly because Scotia has lagged again in the past three weeks,” as the Latin American index has rebounded.

The index has risen 16 percent since sinking to near a five-year low in February while Scotiabank shares have risen 7.9 percent.

‘Show Me’

That’s reversing a trend that saw emerging market equities tumble after the U.S. Federal Reserve signaled in May that it may start scaling back bond purchases that had boosted demand for higher-yielding assets.

Countries including Brazil have also tightened monetary policy as exchange rates plunged, and Argentina’s devaluation of its peso in January dented confidence in Latin America.

Scotiabank may be entering a “show me” phase as investors weigh the impact of Porter’s strategy and the executive changes he’s made since taking over as CEO when Richard Waugh retired, Decker said.

The bank, with operations in more than 55 countries, earned almost half its profit from outside Canada last year, according to its annual report. Earnings from Scotiabank’s operations in Mexico and Peru contributed 11 percent toward the firm’s total profit last year. Scotiabank, which has been in Mexico since 1967, also has consumer-lending operations in countries including Costa Rica, El Salvador, Panama, Uruguay and across the Caribbean.

‘Stormy Weather’

Investor David Baskin said he isn’t deterred by any drag Latin America’s emerging markets have on the stock.

“We like the growth prospects and we recognize that it comes with some stormy weather,” said Baskin, who helps oversee about C$650 million ($590 million) including Scotiabank shares at Baskin Financial Services Inc. in Toronto. “We’re prepared to put up with the bumps because in the end you’re going to get better growth.”

Scotiabank’s often touted emerging-markets exposure will probably continue to hurt valuation in the near term, while boosting long-range performance, said Mario Mendonca, an analyst with Toronto-Dominion Bank’s TD Securities unit. “Over time, we expect Scotia’s specific emerging-markets exposure to outperform market expectations,” he said in a Jan. 28 note.

Scotiabank’s international earnings will increase 3 percent to 4 percent in the first half of 2014 before accelerating to “high single-digit, low double-digit territory” in the second half, Mendonca estimated.

Accept Risks

Scotiabank’s international presence contrasts with other Canadian lenders including Toronto-Dominion and Royal Bank of Canada, whose foreign retail-banking operations are limited to the U.S. or the Caribbean.

Scotiabank’s “strategy is right, but you have to accept there’s going to be risks,” Baskin said.

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