Bank of Nova Scotia, Canada's third-largest lender, could be a potential buyer if HSBC Holdings Plc sells its Mexico operations, according to Gabriel Dechaine, a Canaccord Genuity Group Inc. analyst.

"Despite challenges associated with this business, we believe BNS would be an interested bidder," Dechaine said Tuesday in a note to clients, referring to Scotiabank by its ticker symbol. "Failing a turnaround of this business over the next 12 to 24 months, we believe senior executives at HSBC could consider selling."

HSBC Chief Executive Officer Stuart Gulliver is under pressure to break up Europe’s largest bank amid rising capital demands and a sluggish global economy. In a Feb. 23 earnings call, he cited Mexico as one of four potential markets the lender may exit.

Scotiabank, with operations in more than 55 countries in Latin America, the Caribbean and Asia, is targeting Mexico, Peru, Chile and Colombia as countries offering the best growth potential. Chief Executive Officer Brian Porter said in January that he's preparing the Toronto-based bank's Mexico unit to be a player in that country's "next round of consolidation."

Integration Risks

Scotiabank is the seventh-largest lender in Mexico with a 6 percent market share, Dechaine said in his note. He estimates HSBC Mexico could be worth about C$11.5 billion ($9.2 billion), based on 2.2 times price to tangible book value and a 20 percent takeover premium. That valuation would be 6 percent dilutive to Scotiabank's estimated per-share earnings for 2016, Dechaine said.

Buying the HSBC unit would increase Scotiabank's market share in Mexico to 13 percent, propelling it to a fifth-place ranking in the country, Dechaine said. A 10 percent-plus share is the "magic number" for improved efficiency and scale benefits, he said.

"Integration risks are a key consideration," Dechaine said. "The situation with HSBC Mexico may be even more worrisome, given issues the business has encountered in recent years."

Those issues include money-laundering fines, "troublesome" loans and deteriorating efficiency ratios, he said.

'Priority Markets'

Sharon Wilks, HSBC's Canadian spokeswoman, said the firm doesn't comment on analysts' speculation, as did Scotiabank's Diane Flanagan.

"We are focused on investing in our priority markets, including the countries of the Pacific Alliance," Flanagan said in an e-mailed statement. "This includes Mexico, where we recently announced a C$300 million internal investment."

Scotiabank's Mexico had 179.1 billion pesos ($12 billion) in loans at the end of January, according to data from Mexico's bank regulator. It's the fifth-biggest foreign-owned bank, trailing local units of Banco Bilbao Vizcaya Argentaria SA, Citigroup Inc., Banco Santander SA and HSBC.

HSBC's Gulliver said in the earnings call that Mexico, Brazil, the U.S. and Turkey represent "the biggest problems" in terms of underperforming operations.

"There are parts of the group that aren't offering a return that's anywhere near their cost of equity, and we're working on restructuring those," Gulliver said. "And there are no options in terms of that restructuring that we would not consider."