Scotiabank to Take $980 Million Charge on Colombia Unit Deal

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(Bloomberg) — Bank of Nova Scotia agreed to transfer its operations in Colombia, Costa Rica and Panama to Banco Davivienda SA of Colombia, saying it will take an after-tax charge of C$1.4 billion ($980 million) as a result. 

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The Toronto-based bank has been evaluating the potential sale of a handful of under-performing assets in Latin America for more than a year, and the planned transaction “supports Scotiabank’s operational efficiency efforts in its noncore markets,” the company said in a statement Monday.  

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As part of the transaction, Scotiabank will take a 20% ownership stake in Davivienda, Colombia’s third-largest bank, which has operations in Costa Rica, El Salvador, Honduras, Panama and Miami. Scotiabank will have the right to name one or more directors to serve on the board of the Bogota-based bank, which has more than 24.6 million clients. 

“This is probably not a bad deal for them,” Greg Taylor, chief investment officer at Purpose Investments, which has more than $15 billion of assets under management, said in an interview. “Scotia can turn operations over to Davivienda to get the synergies with their other businesses and still participate as a minority investor. It is also on plan with setting up to focus more on the US.”

The bank has C$14 billion in average assets at its Colombian unit, which reported losses of C$82 million last year and C$50 million in 2023. It doesn’t break out results for its operations in Costa Rica or Panama.

The deal “ticks the box for Scotiabank in terms of its strategic plans while it does not negatively impact its earnings outlook, as we believe that contributions from these countries were minimal at best,” Jefferies Financial Group Inc. analyst John Aiken said in a note to clients Monday.

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Scotiabank first entered the Colombian market in 2010, with the purchase of Royal Bank of Scotland’s corporate and commercial operations in the country. The following year, it agreed to acquire a 51% stake in Banco Colpatria, the country’s fifth-largest bank at the time, in a deal valued at about $1 billion. 

Then, in 2016, the Canadian bank paid roughly $360 million for Citigroup Inc.’s retail and credit-card operations in Panama and Costa Rica.

Exiting Operations

But its business in the region has since disappointed. Chief Executive Officer Scott Thomson said at an investor day in late 2023 that Scotiabank would allocate no additional capital to Colombia and would either turn around or exit its operations there, noting that it was also considering the sale of other Central American operations. 

“Colombia, in particular, had been a drag on Scotiabank’s bottom line for several years,” National Bank of Canada analyst Gabriel Dechaine said in a note Monday. “Although no timeline has been provided, we believe the 20% Davivienda stake could be more profitable to Scotiabank than its current position is, considering that its new partner has existing operations in these three countries that should allow it to extract expense synergies.”

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As part of its pivot to focus on North America, Scotiabank on Dec. 27 completed the remainder of a $2.8 billion deal to acquire 14.9% of Cleveland-based KeyCorp.

The Davivienda deal is subject to regulatory approvals and set to close within a year, Scotiabank said, noting that it will take the impairment charge in the first fiscal quarter. The impairment charge will dent Scotiabank’s Common Equity Tier 1 capital ratio by about 10 to 15 basis points. But when the transaction closes, it should lead to a lower level of risk-weighted assets, the lender said, noting that at that point the CET1 ratio should get a benefit of roughly 10 to 15 basis points.

The lender also expects to record losses of about C$300 million upon closing, the result of currency-translation losses.

(Updates with financial results, analyst comments starting in fifth paragraph.)

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