With its exit from Central America and Colombia, Scotiabank follows the trend of international banks retreating amid rising compliance costs and risks.
Scotiabank has officially exited retail banking in Panama, Costa Rica, and Colombia, marking the latest move by a major international lender to scale back in the region. The deal, which gives Scotiabank a 20% stake in Banco Davivienda in exchange for its retail operations, highlights a broader trend as mounting compliance costs, de-risking pressures, and shifting profit priorities drive global banks to rethink their presence in Latin America and the Caribbean.
Scotiabank’s exit also fulfills a promise CEO Scott Thomson made in 2023 to refocus on more profitable North American markets. The decision marks the end of a more than decade-long expansion that initially defied the de-risking trend. In 2012, Scotiabank made a bold play for Colombia’s growing financial sector, acquiring a majority stake in Banco Colpatria for $1 billion. It continued its push into the region in 2016, purchasing Citibank’s retail operations in Costa Rica and Panama for $360 million.
But while Scotiabank was expanding, many global banks were already reassessing their footprint in high-risk markets.
“As large international banks that provide payment services to the region face tougher compliance measures, many have made a cost-benefit decision that the material compliance costs from doing business in the region far outweigh the benefits,” says Adrian Stokes, CEO of Quantas Capital in Jamaica. “Therefore, it makes good business sense to stop offering correspondent banking services to regional banks.”
The shift has accelerated in recent years as exiting banks cite a combination of rising compliance costs and concerns over anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations. The US Treasury, the European Union, and the intergovernmental Financial Action Task Force (FATF) have deemed certain markets high risk, making operations more costly. Heightened capital requirements, introduced after the 2008 financial crisis to prevent taxpayer-funded bailouts, have further contributed to the de-risking trend.
Latin America and the Caribbean have been hit hardest, with the former losing an average of 30% of its correspondent banks, according to a 2020 report by the Bank for International Settlements. The Bahamas, Belize, Dominica, Jamaica, and St. Vincent and the Grenadines all lost at least 40% of their correspondent banks between 2011 and 2020, with Trinidad and Tobago landing just below that threshold.
Economic Consequences
The banking pullback has limited access to international finance and credit in regions heavily reliant on remittances, worth 20% to 27% of GDP in Central America, and tourism, which accounts for up to 90% of GDP in some Caribbean nations. In 2022, tourism provided 1.8 million direct jobs and generated an estimated $62 billion for the Caribbean: close to half of the $136 billion in GDP the International Monetary Fund estimates for the region for 2024.
A dearth of correspondent banks reduces access to international finance and credit, increases the transaction cost of cross-border payments, and delays innovation, such as hotels’ attempts to go cashless. For clients, the effects can range from reduced access to trade finance, issues with clearing checks and foreign money transactions, and heightened dollar supply concerns in some countries.
Over the decade since HSBC was fined $1.9 billion for laundering cartel money in Mexico, other banks are still being investigated, including Wachovia and TD Bank, which were fined a record $3 billion last October by the US Treasury Department’s Financial Crimes Enforcement Network.
“The same issues in Central and Latin American markets are magnified in the Caribbean,” says Christopher Mejia, emerging markets sovereign analyst at T. Rowe Price. “Operating costs have to include natural disasters in a more difficult environment than in Central America, and [with] much smaller profits to be had. Banks now take into account reputational risks from privacy laws and rules, especially after the Panama Papers [scandal].”
De-risking has also impacted money transfer organizations (MTOs) such as MoneyGram, PayPal, UAE Exchange, and Western Union. Many have made similar decisions to de-risk from the region.
While Scotiabank will retain its commercial banking operation in Colombia, it serves primarily as a relationship management hub for large private companies looking for international banking advice.
“This is a meaningful shift in how we allocate capital,” Thomson told a media roundtable in December 2023, referring to Scotiabank’s plan to focus on more profitable North American markets. “The return profile of the international bank has not been commensurate with the risk, and it’s been a drag on overall returns.”
Filling The Gap
For customers in the Caribbean and Latin America, the shift amounts to a localization or domestication as the international banks’ operations are picked up by local banks or by large conglomerates in the region.
Bancolombia and Grupo Aval, which together own Banco de Bogotá and the BAC group in Central America, were one and two in their local market until the Scotiabank and Banco Davivienda deal. They have grown substantially in Central America, having acquired Banco Reformador (Grupo Financiero Reformador) in Guatemala for $411 million in 2013. The same year, Bancolombia acquired 40% of Banco Agromercantil, also in Guatemala, for $217 million.
“Colombian banks know the operating environment in Central America really well,” says Mejia. “Colombian clients do business in Central America, so they really have economies of scale in these markets.”
Coincidentally, Scotiabank announced that in some of the Caribbean markets in which it remains active, bank profitability in 2024 was the highest in a decade. In the Bahamas, net income of $70 million was 46% higher year over year compared to 2023. And Scotia Group Jamaica reported pre-tax profits of $164 million last July, also 46% higher than the previous year.
In a challenging environment, complicated by a new US administration, what does the region need in the way of banks? “Niche players that are willing to work with regulators,” suggests Mejia “The region needs disruptors that are willing to work within the regulatory frameworks. Once we get those creators, there’s room for more niche players to emerge.”
Solutions to de-risking that would keep global payers in the region are not obvious, however. For global banks pinning their hopes on technology as the solution to operational cost and regulatory issues, blockchain and fintech still face the same issues as traditional banks. Neobanks have made a strong push into Mexico, especially Brazil’s Nubank, as have non-traditional financial institutions like Argentina’s Mercado Libre and Ualá. The latter are among roughly 50 firms awaiting verification by the National Banking and Securities Commission (CNBV); the process can take at least 12 months, and is notorious for delays.
The Caribbean is finding its own potential solution in central-bank stable coins, such as the Eastern Caribbean digital currency DCash. But laws are still being put in place across the region’s assortment of jurisdictions and defensive countermeasures to cyberattacks are still insufficient. Cyberattacks are still nascent in the region, so users have not faced the volume that other parts of the world have. A second concern is a brain drain from the region, an International Information System Security Certification Consortium survey in 2021 suggested Latin America needed 530,000 more cybersecurity professionals. “There is no silver bullet to the compliance challenges the region faces,” Stokes argues. “The only sustainable way to solve this issue is for the region to work in unison to improve controls around AML/CFT issues.”
Some governments in the region blame the de-risking trend on inconsistency and shifts in rulemaking by the US Treasury, FATF, and the EU. Added to these issues is the time lag between countries passing laws—that banks then comply with—and the delay in removal from watch lists for months afterward. Some Latin American and Caribbean countries say this amounts to bullying by more developed countries.
Last fall, President José Raúl Mulino of Panama and others warned that companies from countries that did not update their tax haven lists would not be considered for state contracts. Given that the $6 billion-$8 billion, high-speed Panama-David railway project is up for bid, this is not an empty threat.
