Bank of Nova Scotia is unloading its operations in Puerto Rico and the U.S. Virgin Islands at a loss as the bank continues to shrink its sprawling global footprint.
Scotiabank announced Wednesday that it is selling the divisions to Oriental Bank, a subsidiary of OFG Bancorp, which offers banking and wealth management services in Puerto Rico. The sales will trigger an after-tax net loss for Scotiabank of between $300-million and $360-million, the bank said.
Oriental is paying US$550-million in cash for Scotiabank’s operations in Puerto Rico as well as a US$10-million deposit premium for the operation in the U.S. Virgin Islands. Combined, the two divisions had $2.5-billion in net loans at the end of the first quarter and approximately 1,000 employees. The Puerto Rico operations had a carrying value of $1.56-billion on Scotiabank’s balance sheet at the end of fiscal 2018.
The sale comes as Scotiabank focuses its international operations on four countries, a group it refers to as the Pacific Alliance: Colombia, Chile, Peru and Mexico. The pivot has been a major focus of chief executive Brian Porter, who took over in late 2013 and has aimed to streamline the bank’s global strategy.
For decades, Scotiabank had bulked up abroad, and after numerous acquisitions it was spread across 25 Caribbean islands and owned stakes in everything from Thailand’s Thanachart Bank to a business banking unit in Egypt. By focusing on the Pacific Alliance countries, Scotiabank has emphasized markets with fast-growing middle classes.
Scotiabank’s operations in Puerto Rico garnered extra attention over the past four years as the commonwealth struggled with a crippling debt load that sent it into a financial tailspin. In 2015, when Puerto Rico’s debt crisis erupted, the commonwealth had more municipal debt per capita than any U.S. state.
Puerto Rico has continued to face economic woes in the aftermath of Hurricane Maria.
While Scotiabank has operated in Puerto Rico for more than a century, it doubled down in 2010 by acquiring R-G Premier Bank after it was taken into receivership by the U.S. Federal Deposit Insurance Corp. (FDIC). The deal brought Puerto Rico to 1.3 per cent of Scotiabank’s total assets, however, $5.3-billion of the acquired loans were covered by a loss-sharing agreement with the FDIC and the regulator had promised to take the hit for 80 per cent of any losses.
At the end of Scotiabank’s 2018 fiscal year, the carrying value of the loans covered by the FDIC guarantee was $1.3-billion. Scotiabank has also worked to lower its risk in Puerto Rico, with total non-performing assets declining by 62 per cent since 2016. Its total direct exposure to Puerto Rico’s government “is no longer significant,” according to an OFG statement Wednesday.
If the sale is approved by regulators, Oriental will become Puerto Rico’s second-largest bank, based on the total value of core deposits – a key metric for retail banks. Deposits will total US$7.9-billion, while OFG’s loan portfolio will total US$7.2-billion.
Three Canadian banks – Scotiabank, Royal Bank of Canada and Canadian Imperial Bank of Commerce – are leading lenders in the Caribbean, and each has faced problems in the region. Despite a decade of economic expansion in North America, pockets of the Caribbean have struggled since the global financial crisis of 2008 and each bank has made changes to its portfolio.
In 2014, RBC sold its Jamaican arm to Sagicor Group Jamaica Ltd., a rival lender in the Caribbean, incurring a $60-million after-tax loss on the sale. In 2018, CIBC tried to list its entire FirstCaribbean operation through an initial public offering in the United States, a deal that would have allowed CIBC to start selling down its stake, but the effort was abandoned because it failed to garner enough support.
In 2018, Scotiabank also announced that it was selling its banking operations in nine Caribbean countries as well as its life insurance businesses in Jamaica and Trinidad.
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Tim Kiladze