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

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). All trends are Stable. Scotiabank’s ratings remain supported by its diversified earnings profile (Canadian Banking, International Banking, Global Wealth Management and Global Banking and Markets), culture of controlling costs and prudent management of credit risk.

Excluding the $614 million after-tax gain on the sale of Scotia Plaza, adjusted earnings for the nine months ended Q3 2012 increased by 11.5% relative to the earnings of the same prior-year period. Contributions to growth in adjusted pre-tax income were well diversified across operating segments, with each operational area generating pre-tax income growth north of 12% over the nine months ended Q3 2012 relative to the same prior-year period. Scotiabank continues to expand its footprint, both geographically and within business lines, by leveraging organic growth opportunities while still favouring an acquisition-oriented strategy, most recently demonstrated through the purchase of ING Bank of Canada (ING Canada) in late August 2012 and the addition of Colombian-based Banco Colpatria in January 2012. The $3.13 billion purchase of ING Canada ($1.9 billion after deducting excess capital) adds $30 billion in retail deposits, positioning Scotiabank in third place to the leading deposit market share positions held by its Canadian banking peers The Toronto-Dominion Bank and Royal Bank of Canada.

The Bank is conscious of maintaining a balanced earnings profile as it continues to grow. Scotiabank’s completion of the DundeeWealth acquisition in the second quarter of 2011 bolstered contributions from Global Wealth Management. This acquisition balanced the relative contribution from each of the four operating segments to a level more in line with management’s target of between 20% to 30% of earnings generated by each segment. The relative earnings contribution from International Banking has decreased over the past few years to a level closer to the middle of management’s earnings guidance range (25%), down from the upper end of the range (30%) experienced from 2006 to 2009. The geographic diversification of Scotiabank, notably in the Latin American and Asian emerging markets, offers a different growth profile for the Bank relative to its Canadian peers, which remain more tied to the North American economic environment.

Scotiabank’s Deposits & Senior Debt rating of 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 Deposits & Senior Debt 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 Global Banking & Markets, which represented 32%, 25%, 19% and 24% of earnings in the nine months ended 2012 (excluding 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 seventh 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, Chile (Banco del Desarrollo), Colombia (with the recent acquisition of Banco Colpatria), and Peru (Scotiabank Peru S.A.A.)) and Asia (including investments in Thanachart). Global Banking and Markets is a full-service domestic corporate and investment bank and a niche player in the United States, Europe and select countries in Latin America; it has a leading global precious metal operation through ScotiaMocatta.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2012), DBRS Criteria: Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments (April 2010), 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 the DBRS website.

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 and The Bank of Nova Scotia, its parent.

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 by clicking the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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

Lead Analyst: Brenda Lum
Rating Committee Chair: Kent Wideman
Initial Rating Date: March 31, 1979
Most Recent Rating Update: August 29, 2012