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Scotiabank walks away from China deal after deadlock

Pedestrians pass by a Scotiabank location in Toronto in this file photo.

Kevin Van Paassen/The Globe and Mail

Bank of Nova Scotia abandoned a China acquisition it once touted as having "strategic importance" as the deal stalled in the country's approval process.

Nearly two years ago, Scotiabank announced its agreement to buy 19.99 per cent of Bank of Guangzhou in southern China for $719-million in a deal that would let the bank tap the third-largest urban market in China behind Shanghai and Beijing. "Asia is a region of strategic importance for Scotiabank and enhancing our investment in China supports our long-term growth strategy," the bank said in its September, 2011, statement.

But Scotiabank walked away from the deal Friday, saying only that the partnership failed "in light of changing conditions."

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While the broken China deal leaves the lender reliant on Latin America for the bulk of its revenue outside of Canada's borders, investors didn't see this as a negative development. The bank's stock climbed a few cents higher on Friday, closing at $57.05.

CIBC World Markets analyst Rob Sedran noted that while the deal was expected to be accretive, Scotiabank never clarified just how much it would boost earnings per share.

Mr. Sedran said Scotiabank investors have reason to be relieved the deal didn't go through. "With the rising concerns in the markets and in the media over the state of the Chinese banking system, we actually view the decision to step back from this acquisition as a modest positive for the bank," he wrote in a research report to clients.

Guangzhou is the capital of Guangdong Province, where China's economic reforms started more than three decades ago.

As the province's manufacturing base grew, and with its proximity to the international finance and shipping hub of Hong Kong, Guangdong became one of China's wealthiest regions.

In Friday's statement, the bank said that it remains committed to growing in China, yet given generally long lead times for approvals in China, Scotiabank will remain reliant on Latin America to drive its international expansion.

"Asia is interesting, but not the primary driver of [Scotiabank's] valuation," Barclays Capital analyst John Aiken noted.

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Even if the acquisition had gone through, Latin America would have had a much larger imprint on the bank's balance sheet, so investors reasoned that the immediate impact on the stock was negligible. Analysts speculated that investors never had reason to price in the benefits from the potential acquisition, and therefore the stock had little downside when the news of the withdrawal broke.

While Scotiabank often stresses the diversity of its operations, outside of Canada the bulk of its investments have been in Latin America, where the bank has bought assets such as a majority stake in Colombia's Banco Colpatria for $1-billion in January, 2012. Scotiabank's international unit is divided into three regions – Latin America, the Caribbean and Central America, and Asia – and Latin America's loan growth was the highest of all three in the second quarter this year. In that period, revenues from Latin America amounted to $1.1-billion while Caribbean and Central America brought in $485-million and Asia $219-million.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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