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

DBRS Limited has today confirmed the ratings of Bank of Nova Scotia (Scotiabank, BNS 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, Global Wealth Management and Scotia Capital), strong cost-control culture and credit risk management. Three years ago, the contribution of its International Banking segment was starting to reach 37% to 38% of net income, which was in excess of its one-third target. In order to rebalance the earnings profile, the Bank invested more heavily in other businesses, particularly in the under-represented Global Wealth Management segment. As a result, BNS’s earnings profile is more balanced today. Recognizing that International Banking has the highest growth potential, DBRS expects Scotiabank will continue to make investments in other segments to sustain this balance.

With the execution of the global wealth management strategy, BNS has significantly increased its market share in domestic asset management through its acquisition of DundeeWealth Inc. With this acquisition, Scotiabank became the fifth largest mutual fund provider in Canada (IFIC) and has subsequently increased its market share ranking. The Bank has already been generating synergies by utilizing Goodman & Company, Investment Counsel Ltd. (Goodman), a subsidiary of DundeeWealth, as portfolio advisor or subadvisor to a large number of existing Scotia mutual funds. Goodman has had a good performance track record for a number of years as reflected in the quartile rankings of its Dynamic Funds. DBRS believes management of the cultural differences between DundeeWealth and the existing wealth management businesses will be important to driving operational synergies.

Following the DundeeWealth announcement, the Bank has had to contend with extensive speculation about its holdings of CI Financial (CI), especially given differences related to corporate governance issue between Scotiabank and CI’s board of directors. Notwithstanding the differences in opinions, BNS recognizes the substantial value inherent in its CI investment.

Other acquisitions, albeit more modest, include an advisor to ultra-high net worth clients and their families and a few global wealth management divisions. BNS has also been expanding its insurance offering by introducing new products and building additional retail insurance centres. DBRS expects Scotiabank will continue to expand its wealth management businesses in order to maintain proportional growth among its other segments such that the risk profile of the Bank does not materially change in the medium term. Global Wealth Management accounted for 15% of pre-tax earnings (excluding the gain related to the write-up of the original investment in DundeeWealth Inc. and the Other segment) in H1 2011.

Recognizing the growth opportunities in Latin America (Mexico, Caribbean, Central America and South America) and Asia, Scotiabank continues to expand its footprint. Although DBRS believes these investments have higher risk profiles than investments in developed markets, resulting in additional political, economic, currency and operational risks, BNS’s geographic diversification and long-standing experience in developing markets should temper economic and political risks that may arise from time to time.

Scotiabank has a significant cost advantage relative to its Canadian banking peers. Although this differential has been narrowing over the last few years, it nevertheless is a key success factor and a contributor to earnings growth. Since 2000, except for one year, Scotiabank has had the lowest expense ratio of the largest five Canadian banks.

Other significant developments include the implications of Basel III on capital and liquidity and the adoption of IFRS starting in fiscal 2012. Scotiabank, like its Canadian Bank peers, will be using international financial reporting standards starting in fiscal 2012. The Office of the Superintendent of Financial Institutions (OSFI) will permit the Canadian banks to phase-in the impact of IFRS on Tier 1 capital over a five-quarter period beginning in Q1 2012.

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

Based in Toronto, Canada, the Bank of Nova Scotia has a full-service domestic retail banking operation, international retail banking franchises (Mexico, the Caribbean, Central America, South America and Thailand), wealth management primarily in Canada, 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 four operating segments: Canadian Banking, International Banking, Global Wealth Management and Scotia Capital, which represent 36%, 26%, 15%, and 23% of pre-tax earnings in fiscal H1 2011 (excluding the gain related to the write-up of the original investment in DundeeWealth Inc. and the Other segment), respectively. Over time, the objective is to generate diversified earnings from each of the four operating segments, with an emphasis on retail and commercial operations.

Canadian Banking includes retail, small business and commercial businesses. Global Wealth Management is a combination of Canadian and international wealth management and global insurance. 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 Uruguay and Chile (Banco del Desarrollo), and Peru (Scotiabank Peru S.A.A.) and Asia (including investments in Thanachart/Siam City Bank in Thailand). Scotia Capital is a full-service domestic corporate and investment bank and a niche player in the United States, Europe and select countries in Latin America and Asia; 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 ($572 billion) as of H1 2011.

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

Scotia Mortgage Corporation, Montreal Trust Company of Canada and National Trust Company are unconditionally guaranteed by Bank of Nova Scotia.

The rating of Maple Trust Company is exclusively in regard to the obligations of Maple Trust Company under one specific securitization transaction. The rating has been provided in order to satisfy rating requirements contained in the securitization documentation; the rating should only be used for this purpose. The rating is based on a performance guarantee dated May 30, 2008 between Maple Trust Company The Bank of Nova Scotia, its parent.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (January 14, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009), and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on our website under Methodologies.

The sources of information used for this rating include information provided by the Bank of Nova Scotia, Investment Funds Institute of Canada, Bank for International Settlements, and Office of the Superintendent of Financial Institutions Canada. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

For additional information on this rating, please see Banks and Banking Organisations Linking Document Linking Document by clicking the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

Lead Analyst: Brenda Lum
Rating Committee Chair: Brenda Lum
Initial Rating Date: March 31, 1979
Most Recent Rating Update: June 30, 2010