DBRS Confirms Ratings on Bank of Nova Scotia, Negative Trend

DBRS Limited (DBRS) has today confirmed the ratings on 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). Trends on senior long-term debt ratings, short-term instruments and older-style subordinated debt remain Negative, while other capital instruments whose ratings are notched down from the Bank’s intrinsic assessment continue to have Stable trends. Scotiabank’s ratings remain supported by its diversified earnings profile, culture of controlling costs and prudent management of credit risk which is particularly important given the Bank’s exposure to some less developed countries.

Scotiabank’s long-term deposits and Senior Debt rating, at AA, is composed of an intrinsic assessment of AA (low) and 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 ratings. The Negative trend reflects DBRS’s view that anticipated changes in Canadian legislation and regulation mean that the potential for timely support for these systemically important institutions is declining and is likely to eventually result in a change in DBRS’s support assessment to SA3 from SA2 for this institution. At the same time, DBRS notes that an additional layer of protection for non-bail-in-able debt and deposits may eventually be provided by bail-in-able senior debt under the anticipated bail-in debt regime. DBRS will assess the impact of the “Taxpayer Protection and Bank Recapitalization Regime” rules as more details are made available by the authorities.

As Canada’s most geographically diverse bank, Scotiabank continues to increase its presence in the international banking scene by leveraging organic growth opportunities generated from notable acquisitions in prior years together with an acquisitions-based strategy. While there have been wholesale changes in senior management ranks since Brian Porter was appointed as Chief Executive Officer in late 2013 and the Bank has recently recorded restructuring charges in an attempt to reduce structural costs, the team is highly experienced with a well-articulated and consistent strategy.

BNS continues to deliver excellent returns, with return on common equity generally in the mid-to-high teens. The Bank’s diversified earnings base, including good proportions of non-interest revenue, are key to the Bank’s strength and ability to withstand stresses.

Scotiabank’s overall risk profile is very strong with a diversified portfolio and manageable direct exposures to oil and gas (O&G). While offering greater growth opportunities and potentially higher returns, Scotiabank’s investments in the Caribbean, Central America, South America and Asia have inherently higher risk profiles relative to more developed markets, resulting in additional political, economic, currency and operational risks.

As with other Canadian banks, Scotiabank has a notable exposure to the Canadian residential mortgage market. Any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market could hurt asset-quality indicators and ultimately have an impact on provisioning levels. Asset quality within the Canadian market will be determined by the extent to which any deteriorating consumer credit quality trends materialize in the Canadian market, including potentially as an indirect result of volatility in O&G. At this point, there are no material observable problems.

Scotiabank’s financial risk profile remains robust as a result of solid internal capital generation, reasonable quality of capital and strong capital ratios. The Bank has made strides toward improving its funding profile by actively growing its personal deposits market share with a goal to reducing reliance on wholesale funding sources.

Scotiabank’s rating could be positively influenced with continued successful execution of its diverse international retail banking strategy without increasing risk. In addition to the support and other considerations noted earlier with respect to the Negative trend, other factors with negative rating implications include an increase in risk appetite or notable weakening of asset quality or franchise. A failure to decrease the proportion of wholesale debt in BNS’s funding mix may also have negative rating implications.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2015), Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015), and DBRS Criteria: Support Assessment for Banks and Banking Organisations (March 2015), which can be found on DBRS’s website at www.dbrs.com.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.