Paul Bagnell

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A string of blockbuster acquisitions, a badly underperforming stock and an asset mix like no other in Canadian banking make Bank of Nova Scotia (BNS.TO) the bank to watch in 2019.

Portfolio managers often say one-tried-and-true way to make gains in Canadian bank stocks is to buy shares of last year’s laggards and wait patiently while the stocks “revert to the mean”, or catch up with valuations of the Big Six bank group.

And Scotia is clearly a 2018 laggard. As I write this, its shares are down 14.7 per cent so far in 2018 and its total return, which includes the impact of dividends paid, is minus-11.9 per cent. Only CIBC has weaker numbers, and they are only slightly deeper in the red than Scotia.

But there are good reasons to challenge the “this year’s laggard is next year’s outperformer” thesis on Scotia. The bank has made a number of game-changing acquisitions, in Canada and in South America. How successfully Scotia integrates those new businesses, and how well it drives returns higher, will be crucial to the Scotiabank story in 2019.

Scotia has made two big acquisitions recently in its favoured Latin American economies. Scotia’s big banking operations there, and in other non-North American locales, is what makes Scotia’s asset mix unique. The acquisition came just over a year ago, when Scotia agreed to buy two-thirds of a major Chilean Bank – BBVA Chile – for $2.9 billion. Scotia will combine BBVA Chile with its existing Chilean banking operations to make itself the fourth-largest bank in the country with 14 per cent market share.

In Peru, Scotia is on track to become the country’s second-largest credit card issuer. That’s because, in early May, it agreed to buy 51 per cent of Banco Cencosud, a consumer lender tied to a major Peruvian retailer. The Cencosud deal is much smaller than the BBVA acquisition in Chile, but like the Chilean deal, it gives Scotia greater scale in the Pacific Alliance economies Scotia prizes so much: Peru, Chile, Mexico and Colombia.

Here at home, Scotia deepened its wealth management business in a big way this year. In February, it agreed to pay $950 million for Jarislowsky Fraser, the wealth management company founded and built by famed money manager Stephen Jarislowsky. In late May, Scotia announced it would pay $2.59 billion to purchase MD Financial, a respected asset manager with affluent doctors as its clients.

Those are four deals that should, in time, make Scotia significantly more profitable. The Chile and Peru assets are in high-growth economies. The wealth management businesses provide steady fee-based income.

So execution becomes the Scotia story in 2019.

Analysts are taking nothing for granted.

Gabriel Dechaine, a bank analyst at National Bank Financial, said “execution on M&A integration is of utmost importance” when he recently looked ahead to Scotia’s 2019. The bank’s task will be to drive up the return on invested capital on the newly acquired businesses into double-digit territory, up from lackluster single-digits he estimates the businesses are now generating for Scotia.

For Scotia’s stock to catch up with -- and outperform -- the other bank stocks, Dechaine wrote, these newly acquired businesses must boost earnings per share growth at Scotia to better-than-peer-group levels.

Scott Chan at Canaccord Genuity also sees acquisition integration as key. And he notes that slumping stock markets have only made things more challenging for the wealth management businesses.

In September 2017, when Scotia was performing due diligence on BBVA Chile, CEO Brian Porter called the chance to acquire two-thirds of BBVA “a once in a lifetime opportunity.”

2019 will be the year Bank of Nova Scotia must prove Porter correct.