DBRS Confirms Bank of Nova Scotia Ratings at AA and R-1 (high)

DBRS has today confirmed the ratings and trends of Bank of Nova Scotia (Scotiabank or the Bank) and its related entities, including Scotiabank’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high). All trends are Stable.

The ratings are supported by Scotiabank’s diversified earnings profile (Domestic Banking, International Banking and Scotia Capital), and strong cost-control culture. Scotiabank has a disciplined cost culture that is a competitive advantage among its Canadian banking peers and is a contributing factor to earnings growth, especially as revenue growth slows.

In Canada, the Bank has made it a priority to grow its wealth management business. The acquisition of 37.6% of CI Financial Income Fund and E*Trade Canada in 2008, and an original 18% equity investment in DundeeWealth Inc., are steps that will give BNS leverage to the positive long-term trends in the wealth management industry as well as contribute to generating more fee-based income. BNS’s wealth management operations remain smaller than its Canadian bank peers.

The growth in domestic wealth management may temper the relative contribution from emerging markets. BNS continues to view emerging markets as high growth areas. Should the relative importance of international operations increase significantly given more positive growth prospects relative to domestic banking, DBRS believes the risk profile of the Bank will increase in the medium term. DBRS believes Scotiabank’s investments in the Caribbean, Central America, South America and Asia have inherently higher risk profiles relative to developed markets, resulting in additional political, economic, currency and operational risks. DBRS considers geographic diversification and long-standing experience in emerging markets to somewhat temper economic and political risks that may arise occasionally. Over time, DBRS anticipates International Banking will be a major contributor to earnings. In 2008, this segment contributed 34% of the Bank’s pre-tax earnings (excluding the Other segment).

The Bank’s financial performance has been notably resilient over the past six months in the face of weak economic conditions and valuation charges. The inclusion of Banco del Desarrollo in Chile, Dundee Bank, an additional 20% stake in Scotiabank Perú, E*Trade Canada and 37.6% of CI Financial Income Fund, and organic growth were contributing factors to positive earnings. Although there was a pause in international acquisitions during the year, going forward, DBRS would expect the Bank to resume this strategy, especially if there are opportunities at a reasonable price.

BNS, like its peers, has been challenged by a weak global economic environment, as such loan loss provisions have been rising significantly. From the perspective of coverage, the Bank’s earnings before loan losses and taxes were four times the level of loan loss provisions in H1 2009, which is at the high end of the range compared to Canadian bank peers. The Bank’s specific and general allowances have been increasing and a sectoral allowance ($60 million) for auto exposures was created. At the end of Q2 2009, BNS’s wholesale auto portfolio was $5.0 billion, consisting of $2.9 billion in dealers/floorplans, $1.1 billion in finance and leasing, $0.8 billion in parts manufacturing and $0.2 billion on original equipment manufacturers (OEMs) (Ford and General Motors).

Given many of its Canadian bank peers have been aggressively raising Tier 1 capital in the markets, BNS’s capital ratios, at 9.6% Tier 1 capital ratio and 7.6% tangible common equity to risk weighted assets at the end of H1 2009, are at the low end of its peer group range. Nevertheless, the Bank’s capital levels provide it with flexibility to manage its growth strategy and the ability to absorb unforeseen shocks. BNS’s strong internal capital generation has made it possible for the Bank to maintain its acquisitive appetite.

BNS’s long-term deposits and senior debt rating, at AA, is composed of its intrinsic assessment at AA (low) and its support assessment at SA2 (reflecting the expectation of systemic and timely external support by the government of Canada). The SA2 results in a one-notch benefit to the senior debt and deposits and subordinated debt ratings, which benefit from this implied support.

On April 20, 2009, DBRS announced a change to the banking methodology, specifically to bank preferred shares and Tier 1 innovative instruments. Following a review, the change resulted in a downgrade of these instruments by one notch on June 29, 2009. Please see the related DBRS press releases for further details.

Headquartered in Toronto, Canada, Bank of Nova Scotia has a full-service retail banking operation and wealth management in Canada, international retail banking franchises (Mexico, the Caribbean, Central America and South America) and a full-service domestic corporate and investment bank with global precious metal capabilities. Scotiabank is the most internationally diversified of Canada’s major banks.

The Bank has three operating segments: Canadian Banking, International Banking and Scotia Capital, represent 47%, 32%, and 21% of adjusted net income in fiscal 2008 (excluding the Other segment), respectively. Over time, the objective is to generate 40%, 30% and 30% of earnings, respectively, from each of the three operating segments, with an emphasis on retail and commercial operations.

Canadian Banking includes retail, small business, commercial and wealth management businesses. International Banking incorporates Scotiabank’s 97% ownership of Scotiabank Mexico (Mexico’s sixth largest bank) and franchises in the Caribbean, Central America (including Jamaica, Puerto Rico, the Bahamas, the Dominican Republic, Trinidad and Tobago, Costa Rica and El Salvador), South America (including Banco del Desarrollo in Chile, Venezuela and Scotiabank Peru) and Asia. Scotia Capital is a full-service domestic corporate and investment bank and a niche player in the United States and Europe; it has a leading global precious metal operation through ScotiaMocatta.

Bank of Nova Scotia is the third largest Schedule 1 bank in Canada as measured by assets ($514 billion) as of H1 2009.

Notes:
All figures are in Canadian dollars unless otherwise noted.

DBRS ratings also apply to Scotia Mortgage Corporation, Montreal Trust Company of Canada and National Trust Company, which are unconditionally guaranteed by Bank of Nova Scotia.

The applicable methodologies are Rating Banks in Canada, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment and Rating Preferred Shares and Equivalent Hybrids, which can be found on the DBRS website under Methodologies.

This is a Corporate (Financial Institutions) rating.