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SCOTIABANK CEO SHIFTS FOCUS TO NORTH AMERICA, VOWS 'SIGNIFICANT' CHANGE IN
MINDSET
Scott Thomson to reallocate capital from developing markets to developed ones
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Author of the article:
Barbara Shecter
Published Dec 13, 2023 • Last updated 6 days ago • 4 minute read
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Bank of Nova Scotia will reallocate capital from developing markets to developed
ones, prioritizing Canada, the United States and Mexico, in an effort to bolster
profitability. Photo by Cole Burston/Bloomberg
ARTICLE CONTENT
The Bank of Nova Scotia will reallocate capital from developing markets to
developed ones, prioritizing Canada, the United States and Mexico in that order,
as it seeks to bolster profitability and shareholder returns, chief executive
Scott Thomson said Dec. 13 as he unveiled a much-anticipated strategic update.
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SCOTIABANK CEO SHIFTS FOCUS TO NORTH AMERICA, VOWS 'SIGNIFICANT' CHANGE IN
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Thomson, who was plucked from the boardroom rather than the bank’s executive
ranks in late 2022, promised investors “a significant change in mindset” at
Scotia, which has underperformed peers over the past 10 years.
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That will include a renewed emphasis on its home market and North America more
broadly, as it backs away from an international strategy that has not lived up
to expectations.
“Although work has been done to reposition the bank, it is important to
acknowledge that we have lagged our peers in financial metrics that are key
drivers of shareholder (value) creation,” Thomson said in his first presentation
as CEO at Scotia’s annual investor day. “The returns on our capital deployed
have not measured up in the last 10 years and, as a result, Scotiabank’s total
shareholder return has underperformed peers.”
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While Scotia is a top five bank in Mexico, Thomson said the $7 billion it has
spent on acquisitions to build scale in markets including Chile, Peru and
Colombia “have not yet met … return expectations.”
As a result, efforts are underway to improve international results and make them
less volatile, with the goal of turning around those businesses through
efficiency initiatives rather than allocating further capital.
“While this is a long-term strategy, and the best outcomes for these businesses
would be to improve profitability and cost efficiency, if we are not able to
achieve appropriate risk-adjusted returns in these businesses then we will be
prepared to redeploy capital to other businesses in relatively short order,”
Thomson said.
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Colombia has proven to be a challenging market for Scotia and the bank is
conducting a sales process for a consumer finance business in Peru, Thomson
said. But sales in the “turnaround” regions are not the aim.
“There’s not an objective here to sell Peru or to sell Chile,” he said during a
briefing with media. “We just want to run those businesses better.”
At the same time, Scotia intends to “materially” increase investment in its
North American business including corporate banking and wealth management to
drive profitable growth. The priority will be to get a bigger share of clients’
business across the bank by building relationships and streamlining digital
processes, he said.
Scotia already derives 10 per cent of its net income from the United States,
largely through corporate and wholesale banking, Thomson said, adding that the
bank is well-positioned to take advantage of clients with business dealings in
Canada, the U.S. and Mexico.
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“Clients responsible for approximately 30 per cent of our Canadian business
banking revenues have operations in the U.S. or Mexico,” he said, adding that 15
per cent of commercial clients in Mexico have operations north of the border.
Thomson said the bank had been too focused in the past on volume, bringing in
“monoline” clients that don’t do much at the bank beyond a mortgage, bank
account, or auto loan. Going forward across all its geographies, including
Canada, Scotia will concentrate on increasing its share of profitable clients,
he said.
Thomson’s rise to CEO of Scotia was unusual as he is not a veteran banker. He
was recruited from the bank’s board of directors, which he joined in 2016,
skipping over senior executives who might otherwise have gotten the job. He was
a vice-president at investment bank Goldman Sachs Group Inc. early in his career
and has senior executive experience including stints as CEO of Finning
International Inc., the world’s largest dealer of Caterpillar equipment and
engines, and chief financial officer of Talisman Energy Inc.
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Scotia’s board clearly wanted to shake up the bank, whose shares had
underperformed competitors. Under former CEO Brian Porter, Scotia slipped a
notch to fourth spot from the middle of the pack among the big five Canadian
banks, as measured by market capitalization.
Among Canada’s handful of large banks, Scotia has long stood out. For one thing,
a strategic decision was made years ago to pursue sprawling international growth
rather than try to compete in the United States, as other Canadian lenders such
as Bank of Montreal and Toronto-Dominion Bank were doing through the large-scale
acquisition and consolidation of retail banking operations. Scotia was also the
lone member of the Big Five banks to argue against the need for domestic
megamergers in the late 1990s.
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But the strategic decisions have not come without costs. As Royal Bank of
Canada, Bank of Montreal and TD continue to build on solid U.S. franchises and
venture into lucrative private banking there, Scotia has already pulled back
from several international geographies in recent years, citing risks, complex
regulatory requirements and the high technology costs needed to deal with issues
including money laundering. With operations spread across numerous far-flung
geographies, there have also been concerns about “trapped capital” resulting
from certain regulators requiring funds to be held in the country in which they
are generated. This can impact returns and hamper efficient deployment of
capital.
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Even before Thomson took over, a stated intention of Scotia’s pullback from
international markets was to focus on a narrow group known as the Pacific
Alliance, consisting of Mexico, Chile, Peru and Colombia.
“We have exited approximately 25 higher risk geographies,” Thomson said during
his presentation. At its height in 2013, Scotia operated in 54 countries and
territories, according to a Bloomberg News report in 2019.
• Email: bshecter@postmedia.com
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