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Reasons For Scotiabank’s Purchase of Citigroup Costa Rica

Costa Rica Business News – With a deal Tuesday to acquire 27 bank branches in Panama and Costa Rica from Citigroup Inc., Bank of Nova Scotia will rebalance its Latin American portfolio to gain exposure to countries more reliant on exports to the United States than China.

Scotiabank citigroup purchaseFinancial terms of the deal, which will make Scotia the second-largest player in credit cards in both markets with market share in the mid-to-high teens, were not disclosed. But Peter Routledge, an analyst at National Bank Financial, estimates a price-to-book-value ratio of 1.7 times.

The estimated price tag is “not cheap but not a ridiculous over-payment either,” the analyst said in a note sent to clients. He estimated Scotia would add $2.2 billion in assets with the acquisition of the retail and commercial banking businesses.

“This acquisition will nearly triple Scotiabank’s customer base in these two countries from approximately 137,000 to 387,000, providing significant opportunities to leverage leading regional loyalty programs and key strategic alliances,” the bank said in a statement.

The credit card assets acquired by Scotia “will not perform well in the next down cycle in Costa Rica and Panama,” Routledge predicted, citing consumer credit risk as the key worry underlying the transaction.

However, the analyst said he likes the transaction because it “rebalances” the Canadian bank’s Latin American portfolio by reducing the impact of countries such as Chile and Peru.

Scotia faces the risk of a slowing Chinese economy “via its subsidiaries in Chile and Peru – countries in which exports to China make up a substantial share of total exports,” Routledge wrote.

China takes in about 22 per cent of exports from those two countries, versus about three per cent from Panama and Costa Rica, he said.

On the flip side, those two countries ship about 37 per cent of their exports to the United States. That compares to about 13 per cent shipped to the U.S. from Chile and Peru.

“We like the fact that this transaction will modestly re-balance (Bank of Nova Scotia’s) exposure towards countries more reliant on the United States than on China,” the analyst wrote.

After years of stellar growth, China’s gross domestic product grew at a rate of about seven per cent in the first quarter, the slowest in six years.

The United States, on the other hand, has been one of the bright spots this year in the view of many economists. However, recent indicators, such as an unexpected decline in retail sales in June, have tempered that view.

Scotia has operations in the Caribbean, Central America and parts of Asia, in addition to its businesses in North America and Latin America.

By Barbara Shecter, Financial Post

[email protected]

 

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