TORONTO Bank of Nova Scotia (BNS.TO) has agreed to bolster its size in Chile by purchasing a 79 percent stake in the country's seventh largest bank, Banco del Desarrollo, for $810 million, the two companies said on Friday.
Scotiabank is buying the majority stake from three shareholders and said it expects to acquire up to 100 percent of Banco del Desarrollo through a public offering for the remaining shares.
That would value Desarrollo at $1.03 billion.
The Chilean bank has assets of more than $5.1 billion and a network of 74 branches, and specializes in mid-market commercial lending, small business and micro-business lending, and consumer finance.
The deal is expected to close in November. The purchase price may be lowered after Scotiabank finishes its due diligence.
Scotiabank would leap up the rankings to become the sixth-largest player in the Chilean banking market, with $8.6 billion in combined assets and more than 130 branches, plus Desarrollo's 24 small business and micro-lending centers.
Its Chilean unit, Scotiabank Sud Americano, currently has total assets of $3.5 billion and 57 branches, and is active in retail banking.
The planned transaction moves Scotiabank into the "top tier" in the Latin American country, and probably will not be its last investment there, Scotiabank's president and chief executive, Rick Waugh, told analysts on a conference call.
"It's pure speculation as to what will happen but Chile is a country that we see the future is bright and we'll continue to look for other ways to invest in it," Waugh said.
"We're in this for the long haul."
Scotiabank likes the South American country because of its favorable demographics and fast-growing banking sector.
In the last decade, "GDP per capita has increased by roughly 65 percent and the number of people that participate actively in the banking system has increased by more than 75 percent, and we see that demographic continuing," James Callahan, chief executive of Scotiabank Sud Americano, told reporters in Santiago.
Scotiabank expects the investment to add 5 Canadian cents a share to its earnings in the first year of the acquisition, rising to 10 Canadian cents a share by the third year.
Shares of Bank of Nova Scotia rose almost 2 percent to C$52.18 by early afternoon on the Toronto Stock Exchange.
The Canadian bank can "easily absorb the acquisition," said Dundee Securities analyst John Aiken in a note to clients. He estimated that Scotiabank had between C$1.5 billion ($1.4 billion) and C$2.7 billion in excess capital at the end of July.
Scotiabank, which first entered the Chilean market in 1990, will maintain two separate distribution networks. Because the two banks don't have a lot of overlapping operations, "the vast majority" of jobs should be kept, they said in the joint statement.
Vicente Caruz Middleton, president of Banco del Desarrollo, told reporters that the decision to negotiate a sale was not easy, but he added that "Scotiabank's intention to continue developing the bank's business the same way we have up until now has been one of the most important factors for us."
(Additional reporting by Frank Pingue in Toronto and Lisa Yulkowski in Santiago)