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 (Canadian Banking, International Banking and Scotia Capital) and strong cost-control culture.

The diversified business strategy of generating in excess of 40% of profit from Canadian Banking, with the balance split between International Banking and Scotia Capital, is delivering steady earnings, even in turbulent market environments as witnessed over the last three years. So far, domestic acquisitions and organic growth in wealth management have helped maintain the relative balance between these three segments. As Scotiabank continues to expand its international portfolio, DBRS will be looking at proportional growth in its other segments such that the risk profile of the Bank does not materially change in the medium term. More recently, the very strong performance in Scotia Capital Trust (Scotia Capital) led the contribution from international operations to shrink to 25% of the pre-tax earnings (excluding the Other segment) in H1 2010.

DBRS believes International Banking, which has investments in the Caribbean, Central America, South America and Asia, has inherently higher risk profiles than those in developed markets, resulting in additional political, economic, currency and operational risks. DBRS considers geographic diversification and long-standing experience in developing markets to somewhat temper economic and political risks that may arise from time to time.

Scotiabank’s disciplined cost culture is a competitive advantage relative to its Canadian banking peers and a contributing factor to earnings growth. Over the last ten years, except for one, Scotiabank has had the lowest expense ratio compared with the other largest five Canadian banks. The differential relative to the average has been at least five percentage points better.

Following a pause in international acquisitions in 2009, the Bank has resumed its acquisition growth strategy. Historically, the majority of acquisitions were in Latin America, Central America and South America, but more recently the focus has been increasingly in Asia, with an emphasis on countries where Scotiabank already has existing businesses. Notwithstanding the geographic location, acquisition metrics include being manageable in size and scope and consistent with the Bank’s desire to attain approximately 10% market share in its chosen markets. During 2009, Scotiabank’s 49%-owned Thailand affiliate, Thanachart, proposed to acquire Siam City Bank. Siam City Bank combined, with Thanachart, will be the fifth largest bank in Thailand and give Scotiabank approximately 8.3% market share in Thailand, as measured by assets. Please see the DBRS press release dated March 11, 2010, for further details.

Another notable purchase was the acquisition of the banking operations of R-G Premier Bank of Peurto Rico in May 2010, which helped to significantly bolster market share in the territory. The combined entity of R-G Premier Bank and Scotiabank’s exiting operations in Peurto Rico will have a 9% market share. This acquisition was opportunistic given the U.S. Federal Deposit Insurance Corporation (FDIC) loss-sharing agreement in place. Scotiabank, like some of its Canadian bank peers, has taken advantage of weak participants to expand its footprint in desirable geographies. Please see the DBRS press release dated May 3, 2010, for further details.

Although at the low end of its Canadian peer group range, as measured by Tier 1 capital and tangible common equity-to-risk-weighted assets (RWA) ratios, the Bank’s capital levels provide it with flexibility to manage its growth strategy.

Scotiabank’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.

With its headquarters in Toronto, 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, South America and Thailand) 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, which represent 43%, 25% and 32% of adjusted net income in fiscal H1 2010 (excluding the Other segment), respectively. Over time, the objective is to generate 40%, 30% and 30% of earnings from each of the three operating segments, respectively, 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 Inverlat (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 Chile (Banco del Desarrollo), Venezuela and Peru (Scotiabank Peru S.A.A.) and Asia (including Siam City Bank and Thanachart in Thailand). 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 ($526 billion) as of H1 2010.

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 the Global Methodology for Rating Banks and Banking Organisations, Rating Bank Subordinated Debt and Hybrid Capital Instruments with Discretionary Payments, Rating Bank Subordinated Debt and Hybrid Capital Instruments with Contingent Risks, Rating Bank Preferred Shares and Equivalent Hybrids and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on the DBRS website under Methodologies.

This is a Corporate (Financial Institutions) rating.