Scotiabank has announced plans for international expansion, particularly in Mexico where it aims to establish a consumer finance business and wants to nearly double its branch network in the next three years. It also plans to broaden its traditional mid-market segmentation strategy, writes Douglas Blakey.
Scotiabank, Canada’s third-largest bank by assets, has said that it will open 100 new branches in the buoyant Mexican market next year, adding to its nearly 550 existing branches. It hopes to boost the total to 900 locations in the next three years. It will also set up a consumer finance business in Mexico, in an attempt to target Mexican customers who have typically borrowed their money from retailers.
Scotiabank, Canada’s self-styled ‘most international bank’, has operations in India, China, Thailand, Malaysia, the Caribbean and a number of Central American and Latin American countries. It held its annual investor conference in Peru in mid-October to highlight its global credentials. Scotiabank’s international division contributed 31 percent of the bank’s C$3.55 billion ($3.5 billion) profit last year, compared with 19 percent in 2000.
The bank has also announced plans to broaden its segmentation strategy, having traditionally focused its efforts on three segments: mid-market personal banking, corporate and commercial.
According to Rob Pitfield, the bank’s executive vice-president international banking: “We have expanded this to three others – consumer finance, small business and the affluent – and will now attack the marketplace through six different segments. We will run each segment as a business line with its own operating metrics, profit plans and financial reporting. The affluent segment for example, is not one that we have really turned our mind to in a serious way – we will do that now and it represents an excellent opportunity for us.”
Scotiabank has been working on a consumer finance strategy for Mexico for the past year and has drawn on the experience gained from its acquisition of consumer finance banks in Peru and El Salvador. It has been speaking to Mexican retailers about setting up alliances and believes that the consumer finance model will attract customers who might otherwise be intimidated by visiting a bank branch.
Anatol von Hahn, the chief executive officer of Scotiabank Mexico, said at the investor conference: “The first step is let’s get in with credit cards, small credit amounts, a lot of lessons to be learned, hopefully good and bad, and then fix the bad. Having a partner that has some experience helps us, because we can short cut some of those lessons.”
Optimistic about Mexico With a banking penetration rate in Mexico of only 36 percent (compared to over 90 percent in Canada), a growing economy, inflation converging to US standards and country risk at a low rate, Scotiabank is optimistic about future growth in Mexico.
In the past five years, its Mexican operation has achieved 21 percent CAGR in loans, reported a 34 percent CAGR increase in profits during this period and reduced its cost-income ratio from 76 to 57 percent.
“With 105 million people, the population [of Mexico] is more than three times that of Canada and more than half the population is under 25 compared with less than one-third in Canada. A growing middle class, which we define as households with monthly earnings above $1,300 per month, has resulted in more than 11 percent credit growth to the private sector in the past two years and will continue above 10 percent for the foreseeable future,” said von Hahn.
The consumer finance sector, which the bank now intends to target, is defined by Von Hahn as workers who earn between $280 and $1,280 a month.
“We’re not doing it to just do a loan for a fridge or a toaster or a suit, we’re doing it for a relationship. This segment represents 30 percent of Mexico’s spending power and constitutes 52 million people and 12 million families, or 49 percent of the population, and presents excellent growth prospects for Scotiabank. We’ve been working on a strategy, and sizing the prize,” he said.
The bank will also continue to expand its traditional distribution strategy. One successful example is its telesales operation, which opened 160,000 new credit card accounts last year (70 percent of total new accounts).
As regards the branch expansion plans, von Hahn said: “We’ve proven that we can open good branches in good locations and get good results. Now we’re pushing full-throttle ahead to grow with these new branches. Our plan is built on organic growth [but] if any inorganic opportunities present themselves, we’d take a look at it.”
Grupo Scotiabank reported that its personal lending book including credit cards rose by MXN836 million ($75.52 million), or 5 percent, year-on-year to MXN18.57 billion in the second quarter of 2007. Credit quality remained stable, but there was a slight increase in delinquency in the bank’s credit card portfolio.
Claude Norfolk, the bank’s senior vice-president sales and services, disclosed that, group-wide, the bank has work to do to achieve increased cross-sell rates from its existing 5.2 million international retail customers. “The mid-market is our traditional strength and with over 50 percent of our customers under the age of 40, this represents an enormous lifetime opportunity for us. Our approach is very clear, acquire the right customers get all of their business and keep them for life,” said Norfolk.
“Of those 5.2 million international customers, 69 percent have a deposit account but the 31 percent who do not represents 1.6 million people – 38 percent of our customers have loans but only 14 percent have an investment product and 24 percent an insurance product – a big gap we need to fill. We have plenty of room to grow with our existing mid-market customer base.
“For every one percentage point penetration in borrowings from this base increases total revenue by $32 million and each 1 percent increase in insurance penetration boosts revenue by $5 million.”
Increasing cross-sell rates Norfolk predicted that by 2010, the bank could hope to increase its international cross-sale rates by 4 to 6 percentage points. “These are awfully big numbers if you can pull it off and moving these rates by four to six points is very difficult to do and the cross-sell rates will still be below our rates in Canada,” he said.
Scotiabank will target increased market shares by focusing on customer satisfaction rates; currently, the bank reports that 67 percent of its customers surveyed are satisfied with the service they receive.
“This is very high by industry standards and in almost every country we are a cut above the competition by this benchmark but frankly we are not satisfied with this lead,” said Norfolk.
Norfolk has targeted an increase of 10 percent in customer satisfaction rates over the next 36 months.
The bank has also broadened its segmentation policy away from the mid-market, and will now target six segments in the countries where it operates, including the affluent, small business and consumer finance sectors.
“We will be more segment-specific. In Latin America and the Caribbean alone, we have 2 million small business target customers. In the affluent segment, there are more than 1 million households to target with investable assets of more than $250,000 in our markets. While we have a strong master brand it will be refreshed and we have already introduced a new sub-brand for the affluent segment – Scotiabank Scotia Private Client – and are doing the same for the consumer finance segments,” said Norfolk.
Recent acquisitions Scotiabank’s main international acquisitions in the past year have been in Chile and Peru. Last year, it spent $390 million to buy two Peruvian banks, which it then merged with its existing operations in the country to form Scotiabank Peru.
It estimates that around 10 percent of its Peruvian consumer finance customers will graduate each year to become regular bank customers. It plans to boost its 143-branch network in the country by adding another 15 spots next year. The Scotiabank Peru brand launched last year involved a rebranding of all Banco Wiese and Banco Sudamericano branches and offices and Scotiabank is now the third-largest bank in the country.
In the Dominican Republic, it will increase to 70 its existing 58-branch network.
In August, it agreed to purchase 79 percent of Banco del Desarrollo, Chile’s seventh-largest bank, for $810 million, adding 400,000 customers to its customer base. In time, Scotiabank plans to purchase up to 100 percent of the bank. Combined with Scotiabank’s existing Chilean subsidiary, Scotiabank Sud Americano, the merged entity will become Chile’s sixth-largest bank with a network of 131 branches.
Outside the region, it recently completed the initial purchase of 24.99 percent of Thanachart Bank, Thailand’s eighth-largest bank with a network of over 150 branches, for C$240 million. Thanachart Bank, formed from a finance company in Thailand, has announced plans to launch a credit card business in 2008 and aims to acquire 100,000 customers in the first year. Credit cards will be the platform the bank uses to cross-sell into other business such as personal loans and will draw on the experience of Scotiabank’s expertise in the credit card business.
Rival looks to US Scotiabank’s investment in Central and Latin America contrasts sharply with rivals such as Toronto-Dominion Bank, Canada’s second-largest banking group. It has focused on overseas investment in the US, where it will become the seventh-largest bank with more than 2,100 branches following its purchase of Commerce Bank (see RBI 580).