DBRS Rates Bank of Nova Scotia's NVCC AT1 Capital Notes at BBB (high), Stable Trend

DBRS, Inc. (DBRS) assigned a rating of BBB (high) with a Stable trend to the Bank of Nova Scotia’s (Scotiabank or the Bank) NVCC Fixed to Floating Rate Non-Cumulative Subordinated Additional Tier 1 Capital Notes (Capital Notes), including its recent USD 1.25 billion issuance.

DBRS assigned the rating equal to the Bank’s Intrinsic Assessment of AA (low) less four rating notches, which is consistent with DBRS’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. This is one notch below the rating of Scotiabank’s NVCC Subordinated Debt. DBRS notes that the Capital Notes contain the non-viability contingent capital (NVCC) triggers required by the Office of the Superintendent of Financial Institutions and no additional triggers.

While the Capital Notes rank higher than Scotiabank’s NVCC Preferred Shares in an insolvency, they rank below Scotiabank’s NVCC Subordinated Debt. Their multiple in the event of a conversion into equity is 1.25, which is better than the 1.0 multiple for the NVCC Preferred Shares but less than the 1.50 multiple for the NVCC Subordinated Debt. Furthermore, while the notes are structured as junior subordinated debt, they have features that enable them to qualify as Tier 1 capital, including their perpetual nature and right to interrupt interest payments, with any missed payments being non-cumulative. Accordingly, DBRS views the difference in the relative ranking and the expected recovery between the Capital Notes and the NVCC Preferred Shares as insufficient to rate these instruments higher than the NVCC Preferred Shares. At the same time, these characteristics are also consistent with the rating of the NVCC Subordinated Debt at one notch better than the Capital Notes.

Since the instrument is structured as debt, non-Canadian investors avoid a tax of 25% on passive income earned by investors outside of Canada. Positively, this structure potentially opens up a much larger market for future NVCC issuances by the Canadian banks.

RATING DRIVERS
On an intrinsic basis, upward ratings momentum is unlikely, as DBRS views the Bank as well placed within its rating category. Over the longer term, continued successful execution and building of its diverse international banking franchise without increasing risk could be viewed favourably. Conversely, sustained negative operating leverage, an increased reliance on wholesale funding, a material increase in impaired loans (particularly as result of underwriting weakness) or a severe downturn in the housing market could 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.

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

Lead Analyst: John Mackerey, Vice President, Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: 31 December 1980
Most Recent Rating Update: 28 July 2017

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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