Morningstar DBRS Confirms The Bank of Nova Scotia's Long-Term Issuer Rating at AA; Stable Trend
Banking OrganizationsDBRS Limited (Morningstar DBRS) confirmed the credit ratings of The Bank of Nova Scotia (Scotiabank or the Bank) and its related entities, including Scotiabank's Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). The trend on all credit ratings is Stable. Scotiabank's Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of AA (low) and a Support Assessment (SA) of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend). As a result of the SA2 designation, the Bank's Long-Term Issuer Rating benefits from a one-notch uplift to the Bank's IA.
KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect Scotiabank's highly diversified franchise and solid earnings, while its balance sheet fundamentals remain resilient in a challenging operating environment. The Bank's strong Canadian franchise is complemented by an International Banking (IB) segment, which includes high growth, albeit more volatile markets in Latin America and the English-speaking Caribbean, and it represented 28% of the Bank's reported earnings in F2024. The Bank continues to make progress against the key priorities outlined in its new enterprise strategy in 2023, focusing on lower risk, less volatile geographies with growth priorities in Canada, the United States, and Mexico. Scotiabank is also strengthening its balance sheet, including mobilizing more core deposits to reduce reliance on high-cost wholesale funding, while maintaining strong liquidity and capital buffers.
Nevertheless, Morningstar DBRS is concerned about heightened economic and geopolitical uncertainty, particularly as it relates to the U.S. trade policy, which could lead to a disproportionally negative impact on the Bank's profitability and asset quality compared with its Canadian bank peers. Despite a few direct tariff concerns in Canada and Mexico (because of the United States-Mexico-Canada Agreement trade pact) and low reciprocal tariffs on Chile, Columbia, and Peru, the potential economic fallout from the trade war, including weaker global growth, lower commodity prices, and disruptions in global supply chains, could weigh on the Bank's operating markets. Although the overall risk profile is well managed, in Morningstar DBRS' view, the Bank's exposure to emerging markets heightens its risk profile and adds earnings volatility.
Scotiabank's IA of AA (low) has been assigned at the midpoint of the IA Range, as Morningstar DBRS views the Bank's credit fundamentals and performance as commensurate with those of similarly rated peers.
CREDIT RATING DRIVERS
Over the longer term, the Bank's credit ratings would be upgraded if Scotiabank were to continue to significantly build the depth and scale of its franchise, resulting in a sustained improvement in financial performance without increasing its risk profile. Additionally, a material increase in the proportion of core deposits in funding mix and higher capitalization would also lend support to a credit ratings upgrade.
Conversely, Morningstar DBRS would downgrade the credit ratings in the event of a significant deterioration in profitability or asset quality. Additionally, a credit ratings downgrade would occur if the Bank failed to execute on the strategic initiatives, leading to heightened operational risk or a weaker franchise.
CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Very Strong
Scotiabank ranks as the fourth largest bank in Canada by assets (as of Q1 2025), and its highly diversified franchise is underpinned by its focus on five core markets that represent about 84% of earnings in F2024: Canada (53%), the U.S. (9%), and the Pacific Alliance countries of Mexico, Peru, and Chile (22%). As part of its strategy refresh (announced on December 13, 2023), the Bank is focused on growth in Canada, the United States, and Mexico, where about 90% of incremental capital will be allocated, while optimizing existing capital in other markets that have seen lower profitability. The strategic initiatives also emphasize a shift toward multiproduct offerings, including unsecured lending, deposits, insurance, payroll, and competitive cash management, which should help deepen primary client relationships across portfolios. In December 2024, Scotiabank completed the second tranche of investment in American regional lender KeyCorp (KEY; rated A (low) with a Stable trend), which increased the Bank's ownership interest in KEY to 14.92% from 4.9%. In addition, in Q1 2025, Scotiabank announced sale of the banking operations in Colombia, Costa Rica, and Panama to Davivienda in exchange for an approximately 20% ownership stake in the newly combined entity of Davivienda (subject to regulatory approvals).
Earnings Combined Building Block Assessment: Strong/Good
Scotiabank generates solid underlying earnings, with strong operating efficiency. Adjusted net income increased 3.2% year over year (YOY) to $8.6 billion in F2024, driven largely by higher revenues, partly offset by higher provision for credit losses (PCL) and noninterest expenses. Adjusted Q1 2025 earnings were $2.4 billion, an increase of 11.5% quarter over quarter (QOQ), largely because of the same factors noted above. Net interest income increased 5.1% QOQ in Q1 2025, primarily reflecting an 8-basis-point (bps) expansion in net interest margin associated with lower funding costs and loan growth. Noninterest income also increased 16.5% QOQ, mainly because of higher trading-related revenues, income from associated corporations, wealth management revenues, underwriting and advisory fees, and banking fees. On the other hand, adjusted noninterest expenses were up 6.8% QOQ on the back higher salaries and employee benefits, technology-related costs, and professional fees, while PCL increased 12.8% QOQ mainly as a result of higher PCL on performing loans driven by credit migration as well as the continued unfavourable macroeconomic outlook and increased uncertainty arising from potential tariffs. Overall, the Bank's certain profitability metrics remain at the lower end of the peer range, and exposure to emerging markets can add earnings volatility.
Risk Combined Building Block Assessment: Strong/Good
Scotiabank's risk profile is supported by strong asset quality with a manageable level of PCLs and impaired loans. However, the Bank exhibits weaker asset-quality metrics compared with its Canadian bank peers, reflecting Scotiabank's exposure to emerging markets. Positively, this credit risk has historically been well managed, underpinned by the Bank's underwriting practices and knowledge gleaned from its long operating history in emerging markets. The Bank has maintained a diversified business mix by geography and product, with 73% of its IB retail loan portfolio secured. Reflecting ongoing portfolio reviews and de-risking activities, gross loans increased only 1.3% YOY in F2024, driven by 5.9% YOY growth in Canadian portfolios. Meanwhile, International loan balances (including the U.S.) contracted 7.3% YOY in the same period. Overall, asset quality metrics have continued to normalize from unsustainably low levels. The gross impaired loans ratio increased 3 bps QOQ to 91 bps in Q1 2025, driven primarily by the impact of foreign currency translation and higher retail formations in IB mainly in Mexico and Chile. The net write-offs ratio was 49 bps in Q1 2025, compared with 51 bps in Q4 2024. As part of its strategy refresh, the Bank continues to focus on more targeted loan growth to ensure returns are commensurate with risk, including less emphasis on monoline customers.
Funding and Liquidity Combined Building Block Assessment: Strong/Good
Overall, Scotiabank has a solid funding and liquidity profile, supported by a substantial deposit base. However, the Bank has a heavier reliance on higher-cost wholesale funding (at 19.4% of total assets as at Q1 2025) than some peers. As part of the strategy refresh, Scotiabank continued to grow core deposits and further reduced its loan-to-deposit ratio to 105% as at Q1 2025 from 110% in the same period of 2024. Wholesale funding is well managed and diversified by instrument, currency, program, tenor, and source/market. Scotiabank also ensures that its IB subsidiaries are self-funded in their local jurisdictions. In addition, liquidity at the Bank remains strong as it reported all bank Q1 2025 liquidity coverage ratio of 128% (Chile-156%, Mexico-158%, Peru-165%, and Columbia-145%), and a net stable funding ratio of 117%, both comfortably above the regulatory minimums.
Capitalisation Combined Building Block Assessment: Strong
Scotiabank's capitalization is strong, reflecting current capital buffers as well as a significant internal capital generation. The CET1 ratio decreased approximately 20 bps QOQ to 12.9% in Q1 2025, largely because of the close of the Bank's investment in KEY and impairment loss associated with the sale of the banking operations in Colombia, Costa Rica, and Panama to Davivienda. The decrease was partly offset by internal capital generation and the Bank's risk-weighted asset optimization activities. Morningstar DBRS expects Scotiabank will maintain the CET1 ratio at 12% or more in the medium term, above the regulatory minimum of 11.5% for Domestic Systemically Important Banks. In addition, Scotiabank reported Q1 2025 risk-based, total loss-absorbing capacity ratio of 28.8%, and a leverage ratio of 4.4%, both comfortably higher than the regulatory minimums of 25% and 3.5%, respectively.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/452272
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781
Notes:
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 4, 2024; https://dbrs.morningstar.com/research/433881). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024; https://dbrs.morningstar.com/research/437781) in its consideration of ESG factors.
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The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at
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The last credit rating action on this issuer took place on April 18, 2024, when Morningstar DBRS confirmed the credit ratings of the Bank and its related entities.
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Lead Analyst: Shokhrukh Temurov, CFA, Vice President, North American Financial Institution Ratings
Rating Committee Chair: Tim O'Brien, CFA, CAIA, Managing Director, North American Financial Institution Ratings
Initial Rating Date: December 31, 1980
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