Banking: A shift from retail

Scotiabank’s focus has been on developing a suite of high-end wealth-management services, including business succession planning, trust and estate services, private investment counsel and much more, Gowland says.

“We built out the platform – it hasn’t been an inexpensive build, by any stretch – to allow us to provide that full level of service for business owners or for those high or ultra-high net-worth clients,” he says. “Once you build that capability, you have it – and you can continue to offer it and scale it out.”

In February, Scotiabank announced it had acquired Jarislowsky Fraser, the storied Canadian asset-management firm with $40 billion in AUM, for $950 million. Around 77% of that firm’s business is concentrated in the institutional market while the remaining 23% is focused on the UHNW space.

In May, Scotiabank announced that it had acquired MD Financial – a provider of financial services to physicians and their families, with more than $49 billion in assets under management (AUM) and assets under administration (AUA), combined – for a purchase price of $2.6 billion.

That deal allows Scotiabank to provide retail banking, and small-business and private banking services to MD Financial’s 45,000 medical doctor and 65,000 family-member clients. Around 63% of MD Financial’s combined AUM and AUA is held in client accounts worth $1 million or more, Scotiabank reports.

“The bigger you get, the harder it is to find sources of growth,” says Dan Hallett, vice president and principal of Oakville, Ont.-based HighView Financial Group. “Often, it can be easier, cheaper or just more attractive overall to buy your growth rather than try to build it organically.”

Growing organically in the institutional space is particularly challenging, Gowland acknowledges: “Sometimes, it takes decades to build that out – if you can – because there are many that have tried and haven’t been successful.”

Taking the two deals into account, the bank now boasts $233 billion in AUM, an increase of around 50%, with a pronounced move toward private-client and institutional business – and away from retail. Prior to the acquisitions, 77% of Scotiabank’s AUM came from retail, 14% from private client and 9% from institutional. Following the two acquisitions, 57% of Scotiabank’s AUM is from retail, 24% from private client and 19% from institutional.

“[This is part] of the shift away from retail, [for which] the growth rates of mutual funds [sales] are just not that attractive,” says Scott Chan, director of research, financials, at Canaccord Genuity Group Inc. in Toronto. “If you look at the high net-worth segment, the potential growth rate is a lot greater in Canada. And institutional is a global theme in which Scotiabank wants to broaden its product portfolio to offer better products, not just in Canada but internationally as well.”

Scotiabank pulled the trigger on the two deals, Gowland says, because they were complementary fits, not just because they added scale or because acquiring these firms meant keeping them out of competitors’ hands.

“We don’t view acquisitions as a strategy,” Gowland says. “[Instead], we have a strategy for building out our wealth-management offering and saw these [deals] as fantastic opportunities.”

Scotiabank is committed to ensuring Jarislowsky Fraser and MD Financial keep their distinct cultures – something the bank has been successful in achieving with other firms it acquired, such as Dynamic Funds and Tangerine Bank – while looking for ways to grow the two businesses, Gowland says: “Maintaining the integrity of those [firms’] value propositions is critically important.”

Adds Robert Sedran, managing director and head of equity research with CIBC Capital Markets Inc. in Toronto: “Undoubtedly, every bank will try to find synergies. But, at the same time, I think there’s a real understanding from Scotiabank’s management that they cannot break what they bought.”

Nevertheless, both deals will allow Scotiabank to leverage and extend its capabilities and build its business over time.

For example, according to Scotiabank, only about 35% of Canadian doctors were clients of MD Financial at the time of the takeover. This provides the bank with an opportunity to put its marketing muscle behind reaching more potential clients.

Scotiabank signed a 10-year, $115-million affinity agreement with the Canadian Medical Association that will see the bank promote the medical profession and health care in general, while the CMA promotes Scotiabank as the preferred provider of financial services to doctors.

In the case of Jarislowsky Fraser, Scotiabank will be able to leverage the asset-management firm’s capabilities on the bank’s other wealth-management platforms while helping Jarislowsky Fraser round out its products shelf.

“We know that there [are several] Jarislowsky Fraser clients who are very open to having the firm manage more types of mandates than it does now,” Gowland says. “Today, it’s largely a Canadian balance shop, although it has added small-capitalization capability.”

Overall, Scotiabank has stated it wants earnings from global wealth management – a line of business in which the bank has lagged its Big Five bank peers on a relative basis – to grow to 15% of the bank’s total earnings from the current 12%. The recent acquisitions will help Scotiabank get there, Sedran says.

“Scotiabank has not been afraid to divest, in addition to invest, to get where it wants to get to,” says Sedran, referring to the bank’s sale of its stake in CI Financial Corp. in 2014 and its sale of HollisWealth Inc. to Quebec City-based Industrial Alliance Insurance and Financial Services Inc. in 2016.

“[Scotiabank’s acquisitions] aren’t just about accumulating assets,” Sedran adds. “They’re about having an articulated strategic direction.”