DBRS Confirms BNS Ratings at AA and R-1 (high) Following ING Direct Announcement

DBRS 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) following the announcement made by the Bank that it has reached an agreement to acquire ING Bank of Canada (ING). All trends are Stable.

The transaction is consistent with BNS’s strategy to grow its personal-deposit market share. DBRS views this transaction as improving BNS’s funding profile. Integration risks are somewhat diminished as Scotiabank intends to run ING as a stand-alone bank under a separate brand.

ING is the eighth-largest bank in Canada as measured by deposits, with $30 billion outstanding, of which 95% is retail, at June 30, 2012. ING’s over-riding strength is its retail deposit gathering capabilities using non-branch channels (mainly Internet, telephone and mobile banking), thereby allowing attractive pricing as costs are kept low. The acquisition positions the Bank for increased funding diversification; improved funding costs, as this retail funding will replace more expensive wholesale funding; and solidifies BNS’s number three deposit market share. Scotiabank is more dependent on wholesale funding than the average of its Canadian bank peers.

ING has $40 billion in assets, focused primarily in residential mortgages ($29 billion). ING has 1.8 million customers (borrowers and depositors). The ING DIRECT brand will be maintained under a licencing agreement for up to 18 months following the closing.

BNS is paying $3.1 billion in cash, of which $1.5 billion will be from a bought deal offering of 29 million Bank of Nova Scotia common shares and a further $1.2 billion from surplus capital at ING. The transaction is expected to be accretive to earnings in the first 12 months following the close and have a modest impact on BNS’s Basel III Tier 1 common equity capital ratio (taking into account the common share issuance), which DBRS still expects to be in the 7% to 7.5% range.

The transaction is expected to close by December 2012 subject to regulatory approvals. ING will become a wholly owned subsidiary of the Bank.

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, 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.

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

All figures are in Canadian dollars unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (June 2012), DBRS Criteria: Rating Bank Preferred Shares and Equivalent Hybrids (June 2009) and DBRS Criteria: Intrinsic and Support Assessments (February 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 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 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: Kent Wideman
Initial Rating Date: March 31, 1979
Most Recent Rating Update: July 14, 2011