TORONTO, Dec 18 (Reuters) - Bank of Nova Scotia (Scotiabank) is eying North America's booming $1.6 trillion trade with its renewed Mexico bet, a strategy that offers hope but brings risks that have seen many global lenders including Citigroup Inc. scaling back.

Scotiabank's new CEO Scott Thomson, who built a career specializing in Latam, sees the "Mexico First" strategy unveiled last week, offering clients in Canada, the United States and Mexico end-to-end trade finance, helping to differentiate Scotiabank among its Canadian rivals.

The plan will see Canada's No. 4 lender move away from other struggling South American markets. Still, it will expose Scotiabank to a market with unpredictable political risks and where foreign banks have struggled to make inroads, analysts said.

But that is not deterring Scotiabank.

"Trade is a key component of why Mexico is attractive. ... When you see the connectivity of a North American corridor, that's the essence of what we're going after," Scotiabank head of international business Francisco Aristeguieta said in an interview.

Since the three countries hammered out a "New NAFTA" deal in 2020, North American trade has hit $1.6 trillion in 2022 and international companies are moving production closer to customers to tackle supply chain woes. That is expected to add about 1.2% to Mexico's GDP this year.

Aristeguieta, who joined the bank in May, said 14% of Scotiabank's Canadian commercial bank clients have operations in North America and has a 10% market share in Mexico, giving its clients more access to the corridor.

He highlighted auto, energy and medical equipment as attractive sectors. Mexico accounts for more than a third of Scotiabank's international income.

Not everyone is convinced.

"Focusing on that (Mexico) market does make sense. ... But despite those tailwinds, there's still more political, economic, and currency risks in Mexico and Latin America than in Canada or the U.S.," Veritas Investment Research analyst Nigel D'Souza said.

Scotiabank's new strategy is key to reviving confidence in Canada's worst-performing big bank stock this year, which is down 6.6% versus a 5.9% rise in the financial sub-index . It trades at a forward price-to-earnings ratio of 9.6, compared with an industry average of 10.7, according to LSEG data.

Aristeguieta sees 12% growth in the multinational business in Mexico and 50% of its commercial and wealth banking incremental earnings coming from Mexico by the next five years as trade finance often opens door to higher-margin businesses.

Aristeguieta is paying close attention to Mexico's June 2024 election and is hoping that regardless of the outcome, the country offers a stable regulatory framework for foreign investment.

Some 48 banks operate in Mexico, but just seven control 78% of the market share by total assets. Foreign banks like Citigroup have lost market share to local Mexico banks, prompting the U.S. lender to exit. But after struggling to find a buyer, Citigroup is planning an IPO of its Mexico unit.

Flavio Volpe, president of Automotive Parts Manufacturers Association of Canada said Scotiabank could face competition from China, as exporters setting up factories in Mexico to preserve their sales to the United States rely on Beijing lenders.

Tapping the North American trade drove Canadian Pacific Railway to buy Kansas City Southern to create the first direct railway linking Canada, the United States and Mexico in 2021 in a hotly contested deal.

Volpe said Scotiabank could make it work.

"It's a smart strategy for Scotia. Because the (manufacturers) in Mexico are the same ones that they probably have as customers here on a retail basis," he said.

(Reporting by Nivedita Balu in Toronto; Editing by Mark Porter)