Acquisition outlook and anticipated timing of accretion to Diluted EPS remain unchanged
TORONTO, July 6, 2018 /CNW/ - In 2018, Scotiabank has committed or deployed approximately $7 billion in capital towards five acquisitions that will grow the Bank in line with its strategy. The acquisitions of these prized assets have been financed 62% through cash and 38% through the issuance of 33.8 million Scotiabank common shares at a weighted average price of $77.04. These acquisitions increase the Bank's market share in the strategically important Pacific Alliance countries as well as grow and diversify the Bank's wealth management business. To recap:
Personal and Commercial business acquisitions enhance the Bank's presence in core Pacific Alliance countries
- BBVA Chile, a premier bank in one of the most attractive and developed markets in our international footprint, will double Scotiabank's presence in the country and creates one of the largest private banks in Chile – completed in Q3, 2018
- Citibank's Consumer and Small business operation in Colombia, the third largest economy in Latin America, will create the market leader in credit cards in the country and strengthen our overall presence with the addition of 500,000 high quality new customers – completed in Q3, 2018
- A controlling interest in Cencosud Peru creates the second largest card issuer in Peru, and leverages our successful partnership with one of the leading retailers in the Pacific Alliance – anticipated to close in Q4, 2018
Wealth management acquisitions diversify and increase AUM by over $80 billion (40%)
- Jarislowsky Fraser has a long history of delivering outstanding investment capabilities to institutional investors and high net worth customers, and aligns with our strategic commitment to diversify our global wealth management business – completed in Q3, 2018
- MD Financial, the largest Canadian, non-bank Private Investment Counsel, Estate & Trust business measured by assets under management, will result in Scotiabank having the largest Private Investment Counsel business in Canada – anticipated to close in Q4, 2018
Acquisition-related impact of IFRS 9 on acquired performing loans
The recently-implemented accounting standard IFRS 9 – Financial Instruments does not differentiate between originated and purchased loans and as such, requires the same accounting treatment for both. Although credit quality is considered in determining the purchase price, the accounting standard requires the Bank to measure the acquired loan portfolios at fair value and subsequently for performing loans set-up an allowance for credit losses equal to 12 months of expected losses (Stage 1), through the income statement, immediately after the loans come on to the Bank's balance sheet. Consequently in Q3 2018, the Bank will recognize Day 1 acquisition-related provision for credit losses on performing loans of between $375 million and $425 million, applicable only to the BBVA Chile and Citibank Colombia acquisitions. This is expected to reduce reported third quarter Net Income available to common shareholders between $150 and $200 million and Diluted earnings per share between $0.15 and $0.20.
This accounting impact does not change the Bank's view of the quality of the businesses acquired or underlying quality of the acquired loan portfolios. There is no change to the previously-announced impact to the capital ratios of approximately 100 basis points due to these two acquisitions. Further details will be provided with the release of Scotiabank's third quarter results on August 28, 2018.
There is no acquisition-related impact on the wealth management acquisitions, Jarislowsky Fraser and MD Financial.
Integration efforts led by in-country resources
Scotiabank has a long history of successfully acquiring and integrating businesses that strengthen the overall Bank. The resources for integrating the international acquisitions, BBVA Chile, Citibank Colombia and Cencosud Peru, are principally sourced from and led by the respective countries. These resources also include global teams that recently successfully completed the integrations of acquisitions in Central America and resources that were assigned to the replacement of our core banking system in Mexico. We expect to complete the integrations by fiscal 2020.
The execution and integration efforts on the wealth management acquisitions, Jarislowsky Fraser and MD Financial, are less extensive, as these standalone franchises will maintain their independence and continue to provide their core service to their respective clients. System or process integration work and enhancing our broader, combined capabilities is well planned and led by experienced and dedicated teams in Canada.
Accretive to Diluted earnings per share by 2020
Adjusting for the impact of amortization of acquisition-related intangibles and integration costs ("acquisition-related costs") these on-strategy acquisitions, collectively, are estimated to be neutral to Diluted earnings per share in 2019 and accretive by approximately 15 cents in 2020. The Bank will report adjusted Net Income and adjusted Diluted earnings per share, as non-GAAP measures, adjusting for the acquisition-related costs and the Day 1 impact of IFRS 9 on acquired performing loans, commencing this quarter.
The Bank's Common Equity Tier 1 capital ratio is expected to be approximately 10.7% by the fourth quarter of fiscal 2018, upon completion of these acquisitions. Strong internal capital generation and selective, non-core divestitures are expected to contribute to the capital ratio growing to 11% in early fiscal 2019.
Scotiabank is Canada's international bank and a leading financial services provider in North America, Latin America, the Caribbean and Central America, Europe and Asia-Pacific. We are dedicated to helping our 24 million customers become better off through a broad range of advice, products and services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. With a team of more than 89,000 employees and assets of over $926 billion (as at April 30, 2018), Scotiabank trades on the Toronto (TSX: BNS) and New York Exchanges (NYSE: BNS). For more information, please visit www.scotiabank.com and follow us on Twitter @Scotiabank.
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