Scotiabank's Mexico bet eyeing $1.6 trillion N.America trade is not without risks (updated)

Sa Sa International Holdings

18/12/2023 17:19

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    By Nivedita Balu
       TORONTO, Dec 18 (Reuters) - Bank of Nova Scotia
(Scotiabank)  BNS.TO  is eying North America's booming $1.6
trillion trade with its renewed Mexico bet, a strategy that
offers hope but brings risks that have seen many global lenders
including Citigroup Inc.  C.N  scaling back.
    Scotiabank's new CEO Scott Thomson, who built a career
specializing in Latam, sees the "Mexico First" strategy unveiled
last week, offering clients in Canada, the United States and
Mexico end-to-end trade finance, helping to differentiate
Scotiabank among its Canadian rivals.
    The plan will see Canada's No. 4 lender move away from other
struggling South American markets. Still, it will expose
Scotiabank to a market with unpredictable political risks and
where foreign banks have struggled to make inroads, analysts
said. 
    But that is not deterring Scotiabank.
    "Trade is a key component of why Mexico is attractive. ...
When you see the connectivity of a North American corridor,
that's the essence of what we're going after," Scotiabank head
of international business Francisco Aristeguieta said in an
interview.
    Since the three countries hammered out a "New NAFTA" deal in
2020, North American trade has hit $1.6 trillion in 2022 and
international companies are moving production closer to
customers to tackle supply chain woes. That is expected to add
about 1.2% to Mexico's GDP this year.
    Aristeguieta, who joined the bank in May, said 14% of
Scotiabank's Canadian commercial bank clients have operations in
North America and has a 10% market share in Mexico, giving its
clients more access to the corridor. 
    He highlighted auto, energy and medical equipment as
attractive sectors. Mexico accounts for more than a third of
Scotiabank's international income.
    While the strategy shows promise, analysts and shareholders
were not convinced as it comes with risks.
    "Focusing on that (Mexico) market does make sense. ... But
despite those tailwinds, there's still more political, economic,
and currency risks in Mexico and Latin America than in Canada or
the U.S.," Veritas Investment Research analyst Nigel D'Souza
said.
    Scotiabank's new strategy is key to reviving confidence in
Canada's worst-performing big bank stock this year, which is
down 6.6% versus a 5.9% rise in the financial sub-index
 .SPTTFS . It trades at a forward price-to-earnings ratio of
9.6, compared with an industry average of 10.7, according to
LSEG data.
   
 
    Aristeguieta sees 12% growth in the multinational business
in Mexico and 50% of its commercial and wealth banking
incremental earnings coming from Mexico by the next five years
as trade finance often opens door to higher-margin businesses.
    Aristeguieta is paying close attention to Mexico's June 2024
election and is hoping that regardless of the outcome, the
country offers a stable regulatory framework for foreign
investment.
    Some 48 banks operate in Mexico, but just seven control 78%
of the market share by total assets. Foreign banks like
Citigroup have lost market share to local Mexico banks,
prompting the U.S. lender to exit. But after struggling to find
a buyer, Citigroup is planning an IPO of its Mexico unit. 
    Flavio Volpe, president of Automotive Parts Manufacturers
Association of Canada said Scotiabank could face competition
from China, as exporters setting up factories in Mexico to
preserve their sales to the United States rely on Beijing
lenders. 
    Tapping the North American trade drove Canadian Pacific
Railway to buy Kansas City Southern to create the first direct
railway linking Canada, the United States and Mexico in 2021 in
a hotly contested deal.
    Volpe said Scotiabank could make it work.
    "It's a smart strategy for Scotiabank. Because the
(manufacturers) in Mexico are the same ones that they probably
have as customers here on a retail basis," he said. 
        

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 (Reporting by Nivedita Balu in Toronto; Editing by Mark Porter)
 ((Nivedita.Balu@thomsonreuters.com; X: @niveditabalu;))