Under Scotiabank’s chief executive officer Scott Thomson, who took the helm at Canada’s third-largest bank by assets in February, 2023, the U.S. is now fertile ground.CARLOS OSORIO/Reuters
John Turley-Ewart is a regulatory risk management consultant and Canadian banking historian.
The Bank of Nova Scotia’s BNS-T decision to take a 14.9-per-cent minority stake in KeyCorp Bank of Cleveland, investing US$2.8-billion in the process, marks another Canadian bank using the current banking doldrums to seize future growth. National Bank, for example, is acquiring Canadian Western Bank while Royal Bank of Canada has already completed its purchase of HSBC Bank Canada.
Distinguishing Scotiabank’s move is the pivot in the bank’s international strategy, which has seen it focus more on Latin America than the U.S., where Bank of Montreal, RBC, and Toronto-Dominion Bank have long been building a prominent presence.
Under Scotiabank’s chief executive officer Scott Thomson, who took the helm at Canada’s third-largest bank by assets in February, 2023, the U.S. is now fertile ground.
The strategic change has left some analysts scratching their heads. In his initial note on the deal, financial analyst John Aiken at Jeffries Financial Group referred to the move as “surprising” and wondered if Scotia shareholders would warm to their bank’s new interest in the U.S. On the analyst call with KeyCorp officials Monday morning, a Wells Fargo analyst admitted the benefits for KeyCorp were easy to spot, but that the same could not be said for Scotiabank.
For Scotiabank’s CEO, the benefits of the transaction are plain to see. He described the purpose of the deal as a cost-effective way to shift capital from a developing to a developed market that reduced risk.
This is not the first time Scotiabank has made such a pivot. Its success today is founded on a similar yet long-forgotten strategic pivot towards U.S. opportunities that helped provide the profits needed to transition from a regional Nova Scotia-based bank to a Toronto-headquartered national institution with branches across Canada.
In 1884, Scotiabank found itself in the difficult position of having large sums of capital it could not employ safely and profitably in Nova Scotia and nearby provinces. Initial efforts to grow in Winnipeg in the 1870s had proved fruitless and frustrating given the extent of competition and the limited opportunities.
Scotiabank is betting big on the U.S., but investors are slow to applaud
In the search for safer investment harbours, one of the bank’s senior officials, Henry Collingwood McLeod, who later became the equivalent of CEO in 1897, found himself in Minneapolis, Minn. To his delight, he found it teeming with opportunities to safely and profitably redeploy capital.
Scotiabank soon opened an office in that city where it made a name for itself providing large, profitable loans to U.S. banks secured by what in modern financial terms would be deemed Triple- A bonds that were highly liquid. Under Mr. McLeod, Scotiabank became the banker to American bankers in Minneapolis.
By 1892, the business had become so successful the bank was able to take the business to the next level in the U.S., moving Scotiabank’s Minneapolis office to Chicago where it followed the same business model it had perfected in Minneapolis, only this time it was executed in the larger Chicago-area where industrialization was forging the modern era.
The benefits accrued to Scotiabank from this venture are hard to exaggerate. The bank went from a future where stagnation was possible to one where growth drove geographic expansion and success. Indeed, Scotiabank was not the only bank in the Maritimes that faced a grow-or-die scenario in the late 1890s. The Bank of New Brunswick, founded in 1820 and the first bank in Canada to operate under a charter, found itself with an abundance of capital and a lack of safe, profitable opportunities to deploy it. It was ultimately bought-out by Scotiabank in 1913.
Today, Scotiabank’s investment in the U.S. Midwest through its new stake in KeyCorp may seem an odd choice to analysts given its recent preference for Latin America. Yet, examined in the overall arc of the bank’s history – from a Halifax-based institution with a talent for managing risk and seeking out opportunities that matched its risk appetite – the strategy mirrors a time from the past.
What is important for Scotiabank and its shareholders to understand is that the past does not repeat itself, nor does it really rhyme. But it does offer lessons to abide.
Henry Collingwood McLeod’s Scotiabank successfully executed its U.S. strategy in the 1880s and 1890s, setting the bank on a future path that supported its success in the early 20th century. If Mr. Thomson’s Scotiabank can execute today, he may well set the bank on the path to its next successful chapter in 21st-century North American banking.