Bank of Nova Scotia’s planned acquisition of a bank in the Dominican Republic is getting a thumbs down from analysts at New York-based Moody’s Investors Service.
Toronto-based Scotiabank’s agreement to acquire 97.42% of Banco Dominicano del Progreso, S.A. for $328 million is a credit negative for both the bank’s Dominican Republic subsidiary (Scotiabank DR) and the parent bank, Moody’s states in a recent comment.
While the transaction is relatively small from Scotia’s perspective, it’s another signal of the bank’s “increasing commitment to Latin America as other multinational banks exit amid increasing economic volatility,” Moody’s states.
This latest deal follows other recent acquisitions in Chile and Colombia. “Now, the bank will also become more exposed to the Dominican Republic’s higher-risk operating environment,” Moody’s states.
For Scotiabank DR, the transaction is credit negative, “because it will expose the bank to higher asset risks related to higher past-due loans and increase its exposure to foreign-currency lending.” Additionally, Moody’s notes that the deal is unlikely to immediately improve Scotiabank DR’s earnings.
Over the next couple of years, the deal will likely to generate economies of scale, enabling the bank to realize some operating synergies, according to Moody’s. Yet, even after the deal, “Scotiabank DR will remain far smaller than the country’s three leading banks and hence will continue to face a significant competitive disadvantage,” Moody’s states.