By Robb M. Stewart

Bank of Nova Scotia tightened its focus on its core North American operations with a deal to hand its businesses in Colombia, Costa Rica and Panama to Banco Davivienda in exchange for a stake in the enlarged Columbian lender.

The move is expected to result in a hefty impairment loss in the first quarter of 2025 but be capital-neutral as the big Canadian bank continues to shift away from what it now views as noncore markets in favor of areas expected to see growth.

Scotiabank said Monday it will transfer banking operations in the three countries to Davivienda, and in return will receive a combination of newly issued and preferred shares equal to about a 20% stake in the newly combined entity. Scotiabank will have the right to designate directors to serve on Davivienda's board, and the two companies plan to sign a mutual referral agreement for clients.

The Canadian bank forecast the deal will result in an impairment loss of roughly 1.4 billion Canadian dollars (US$968.9 million) in the current quarter, which will reduce its common equity Tier 1 capital ration by about 10 to 15 basis points. It also expects additional losses of some C$300 million when the deal closes, largely related to cumulative foreign exchange translation losses.

Scotiabank expects the transaction to be completed about a year after the deal is signed, subject to regulatory approvals. At closing, it expects to its CET1 ratio to be boosted by about 10 to 15 basis points thanks to a reduction in risk-weighted assets.

The deal is part of Scotiabank's drive for higher returns across its international markets, said Francisco Aristeguieta, the bank's head of international banking. As the operator of the assets being offloaded Davivienda will have more scale and becomes an important partner supporting Scotiabank's global wealth management and global banking and markets businesses in Colombia and Central America, Aristeguieta said.

The deal comes after Scotiabank last month completed the second stage of its investment in KeyCorp, lifting its stake in the regional lender to just under 15% for a total consideration of about US$2.8 billion. The bank anticipates solid earnings growth this year as it benefits from lower funding costs and growth in loans and deposits.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

January 06, 2025 10:42 ET (15:42 GMT)

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