DBRS Comments on BNS Expansion in Colombia

DBRS has today reviewed the announcement made by the Bank of Nova Scotia (BNS or the Bank; rated AA with a Stable trend) that it has reached an agreement to acquire 51% of Colombia’s Banco Colpatria from Mercantil Colpatria S.A. (Mercantil Colpatria). There are no rating implications.

The transaction is consistent with BNS’s strategy of growing its international operations. DBRS views BNS’s international operations as a key component of the Bank’s growth strategy. While this international expansion strategy is not without risk, the risk is managed through diversification among many different countries.

Banco Colpatria is the fifth largest bank in Colombia as measured by loans, with a 5% market share. Banco Colpatria has US$6.2 billion in assets, US$4.9 billion in loans (focused primarily in commercial and small-medium enterprises, credit cards and mortgages) and US$4.2 billion in deposits. The acquisition positions BNS for future retail growth opportunities as Colombia has a relatively low penetration rate of banking. Separately, BNS’s recently acquired wholesale operations in Colombia will be rolled into Banco Colpatria, thereby providing additional leverage opportunities.

The transaction is valued at approximately US$1 billion, with BNS paying US$500 million in cash and ten million Bank of Nova Scotia shares. The transaction is expected to be accretive to earnings in fiscal 2012, estimated to be in the mid-single-digit range, and have a modest impact on BNS’s Basel III Tier 1 common equity capital ratio (decrease of 15 to 20 basis points), which DBRS still expects to be at or above the 7% level in the first quarter of fiscal 2013.

The transaction is expected to close by December 2011, subject to regulatory approvals. The Bank of Nova Scotia will have a majority of the board of directors (four of seven) of Banco Colpatria and the right to appoint a significant number of senior management representatives. Mercantil Colpatria, which owns the remaining 49% at closing, will have the right to sell the remaining 49% to BNS, at market value, after seven years.

Based in Toronto, Canada, the Bank of Nova Scotia is the third largest Schedule 1 bank in Canada as measured by assets ($568 billion) as of Q3 2011. The Bank has a full-service domestic retail banking operation, international retail banking franchises (Mexico, the Caribbean, Central America, South America and Thailand), wealth management primarily in Canada, and a full-service domestic corporate and investment bank with global precious metal capabilities. Bank of Nova Scotia is the most internationally diversified of Canada’s major banks.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (January 14, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009), and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on our website under Methodologies.