Scotiabank in M&A mode

TORONTO Thu Sep 30, 2010 4:19pm EDT

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TORONTO (Reuters) - Two recent acquisitions by Bank of Nova Scotia (BNS.TO) suggest Canada's No.3 bank is starting to make good on its pledge to find strategic growth opportunities, and more deals are likely to follow soon.

Like other Canadian banks, Scotia emerged from the global financial crisis in relatively good shape, and Canadian regulators earlier this month gave the sector a virtual green light to seek avenues to grow.

As a consequence Scotia is now in a prime position to buy from U.S. or European banks looking to shore up their balance sheets by unloading Latin American or Asian assets. Wealth management and wholesale banking are two businesses that it may want to bulk up first.

The recent Scotia deals "definitely signify that they're continuing to look for growth opportunities," said Craig Fehr, an analyst at Edward Jones in St. Louis.

Scotiabank recently said it was buying the Brazilian wholesale banking unit of Commerzbank AG (CBKG.DE), and just this week, it agreed to buy the Chilean corporate and commercial banking operations of Royal Bank of Scotland (RBS.L).

Shortly before those announcements, the bank reorganized its corporate structure.

It created a new unit for its wealth management business and pledged that its Scotia Capital wholesale bank unit would seek "significant" opportunities in Latin America and Asia in areas where Scotiabank already has a presence.

Steve McDonald, co-CEO of Scotia Capital, told Reuters in a recent interview the bank is seeking stronger growth than the tepid expansion expected in North America and Europe.

"Over the next five years we certainly see a lot of growth opportunity in the developing countries, he said.

Both recent deals were small, and took advantage of large offshore banks that have decided to offload foreign assets in the wake of the financial crisis.

Billing itself as "Canada's International Bank," Scotiabank has international retail banking operations spread through Mexico, the Caribbean, Central and South America, as well as Thailand, China and India.

Outside of Mexico, Brazil, and Colombia, Scotiabank has little wholesale banking presence in those regions.

The announced takeovers follow close on heels of the Canadian regulator's lifting of restrictions imposed on banks to limit risk.

The regulator -- the Office of the Superintendent of Financial Institutions -- put a moratorium on large takeovers and dividend hikes in 2008 due to uncertainty over the extent of new bank capital rules due to be unveiled later this year.

But with recent details suggesting that Canada's banks could easily handle the stricter rules, OSFI took off the capital shackles two weeks ago, putting Canada's banks in a prime position to drive growth.

WEALTH MANAGEMENT GROWTH SEEN

While future pickups in Latin America are expected to be small-scale, the potential for a larger acquisitions also exist, some say.

Scotia has been bulking up its wealth management presence in recent years, most dramatically with the purchase of 37 percent of fund manager CI Financial (CIX.TO) in 2008. The bank paid C$2.3 billion to buy the stake from insurer Sun Life Financial (SLF.TO).

Since then, many have wondered if and when Scotia might take out the rest of CI.

Robert Sedran, an analyst at CIBC World Markets, says such a deal is a matter of "not if, but when" though he said the high cost involved and lingering uncertainty over Basel II capital rules means the bank will likely wait.

However, circumstances would seem to be shifting in favor of such a deal.

In addition to the relaxation of OSFI's capital restraints, Scotiabank's creation of a new unit for its wealth management business suggests it wants to grow its presence.

In addition, longtime CI Financial CEO Bill Holland, who has been seen as resistant to selling the company, recently took on a smaller role within CI.

"There could be any number of catalysts," Sedran said.

($1=$1.03 Canadian)

(Reporting by Cameron French; Editing by Frank McGurty)

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