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Analyzing Scotiabank’s LatAm Strategy 

Scotiabank continues its Latin America expansion. Three experts analyze the bank's future strategy in the region.

Latin America Advisor

Scotiabank CEO Richard Waugh said this month that the Canadian bank plans to open 140 new branches outside of Canada next year, with 100 of them in Mexico. What does the competitive landscape for retail and commercial banking in Mexico look like? What's drawing Scotiabank to Latin America? What other foreign banks are vying for positions?

Peter Shaw, Director for Latin American Banks at Fitch Ratings: Scotia is clearly in an expansionary mode in the region—its plans to expand further in Mexico and the planned acquisition of Banco del Desarrollo in Chile are examples of this strategy. It is not alone in seeing potential in the region, as several strong foreign banks have made Latin America a focus of their global diversification and growth strategies—Spain's Banco Santander and BBVA, HSBC, and Citigroup are examples of this. Long present in Latin America and the Caribbean, Scotia has seen its regional presence as an important part of its global strategy; its presence in these markets brings both asset and revenue diversification to its core Canadian business, and the markets it is focusing on in recent months—Mexico and Chile—are the two highest rated countries in the region, both solidly in investment grade territory. The attraction of the Latin markets now is the burgeoning retail banking opportunities, as well as expansion into small and middle market business banking; the Desarrollo acquisition, for instance, will add niches in both these segments that are complementary to Scotia's current presence. The challenge the bank faces throughout the region is to make its investment solidly profitable in increasingly competitive markets. Growth to date has proved profitable for most well-entrenched players, but seasoning of rapidly expanded loan portfolios and more moderate growth may already have begun to put pressure on the recent strong performance. Scotia is generally competing from relatively low market share in most of the region, and this will add to the above mentioned pressures as the bank seeks to expand its presence.

Edward L. Monahan, Jr., Director of Financial Services at Pricewaterhouse-Coopers: Due to wide income gaps among Mexico's bankable population, the formal banking sector has historically targeted the wealthiest 15 percent of the population. The remaining 85 percent has been regarded as risky and unprofitable. On percentage terms, Mexican households with bank accounts are one-third of those in the US and Europe. In the 1990s, US, Canadian, and European financial institutions recognized that providing services to 'subprime' borrowers and lower-income customers in their home markets was a highly profitable activity. As institutions have gained experience in delivering consumer financial services to low- and middle-income sectors, the potential of the Mexican market has become irresistible. In addition, legal, regulatory, and technological enhancements have facilitated foreign bank penetration of the Mexican market. During the past decade, consumer education, credit reporting system development, strengthened bank regulatory supervision, and structural changes to the economy have modernized Mexico's financial system. Foreign banks can now participate in a modern financial sector that is more secure, stable, and predictable than it was throughout recent history. Globalized banking services have found a receptive market in Mexico. In recent years, low interest rates throughout the region have promoted mortgage lending and the use of credit card products among middle-income sectors. Although consumer lending has been growing by 30-40 percent in Mexico, credit card use and access to ATM services have tremendous room for growth. In Mexico, for example, only 30 percent of the employed population uses credit cards, while more than 50 percent now use debit cards for a portion of their daily recurring purchases. Across the region, penetration of broad consumer-based financial services still lags far behind the US and Europe, but room for solid profitable growth is significant. As the larger economies recovered and grew, foreign banks such as Citibank, Santander, and Scotiabank have stepped up consumer lending and telemarketing of financial services. Remittance services between the US and Mexico have grown exponentially among established institutions such as Bank of America, Citibank, and Wachovia.

Nicolás Mariscal, Chairman of Grupo Marhnos in Mexico: Among Latin American countries, Mexico occupies first place in rates of consumer credit and mortgage loan growth. The latter is mainly due to the housing surplus that had accumulated. Fortunately, during the past six years the housing sector has exploded and the trend has been reversed, currently reaching annual growth rates of 28 percent in consumer credit and 26 percent in mortgage loans. The Mexican market has room for growth because of its dynamic demographics, the restoration of income available to the population, the growth of the middle class, and the bancarizacion of lower-income and rural classes. That is why banks like Scotiabank see great potential in these markets. The above confirms the interest shown by companies like Wal-Mart and Elektra, which have entered the banking sector. Latin America indeed has great potential. Brazil is one of four BRIC countries and Mexico is a candidate to become a member (according to a study by Goldman Sachs) ... In Latin America, there is great potential to develop and invest in housing as well as in infrastructure. The above, added to the lack of competition, makes the region a very attractive market for banks.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

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