THE BANK OF NOVA SCOTIA
Fitch Ratings has affirmed
The Rating Outlook is Stable.
Key Rating Drivers
The affirmation reflects BNS's significant market share in
Operating Environment Constraints: BNS's rating is constrained by a weighted average operating environment assessment of 'aa-', which considers the contribution to risk and income from the major markets in which it operates, including
Strong Business Profile: The ratings are supported by BNS's strong retail banking market share in
In
Risk Appetite: Fitch considers BNS's risk appetite to be moderately higher than its peers given higher exposure to emerging markets. The bank's international banking segment contributes a disproportionate share to impaired loans with 72% of gross impaired loans in 2Q24 (modestly lower yoy), despite representing roughly 23% of loans.
The higher emerging market exposure is mitigated by relatively conservative underwriting and low exposure to unsecured consumer credit versus peers.
BNS's retail portfolios continue to shift to secured lending with the Canadian and international retail loan books at 94% secured and 73% secured, respectively, in 2Q24.
Relatively Higher Impairments: The gross impaired loan ratio reached 83 bps in 2Q24, up from 67bps in 2Q23, particularly due to unfavorable commercial credit conditions in
In Fitch's view a short-term cyclical increase in impairments is likely. However, it should normalize as BNS pursues its strategy to optimize its emerging markets' exposure, and there is still sufficient headroom to absorb this deterioration at the current asset quality score of 'aa-'.
Weaker Profitability: Despite an improvement in revenue as BNS focuses on loan portfolio optimization and margin improvement, the bank continues to experience a decline in earnings due to higher provisioning versus peers, as well as the extra required expenditure to execute its new strategy. Fitch expects the pressure on profitability to continue in the near term until the bank reaches its objective of realigning its balance sheet and business lines to achieve higher returns.
Strong Capitalization: In line with industry trends, BNS's CET1 ratio increased to 13.2% at 2Q24 from 12.3% at 2Q23. The increase was driven by lower risk-weighted assets following Basel III adoption, as well as internal capital generation and the positive impact of the bank's dividend reinvestment program. The bank has guided to maintaining its CET1 ratio above 12%.
Improvement in Deposit Funding: Loans as a share of customer deposits, as per Fitch's definition, improved to 112.8% in 2Q24 from 119.6% in 2Q23 as BNS refocuses some of its lending activities which were complimented by initiatives to procure more deposits from bank clients.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Any failures in the implementation of BNS's refreshed strategy that affect asset quality, causing gross loan impairments to structurally rise above 1% over a sustained period of time, or operational mis-steps that result in a sustained decline of operating profitability below similarly rated peers;
Multi-notch operating environment downgrades of core jurisdictions, such as
Negative ratings pressure could also be derived from large trading losses or any material conduct or operational losses which are indicative of lapses in internal controls.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch does not foresee a ratings upgrade in the foreseeable future as the rating is constrained by our assessment of BNS's weighted operating environment. Any positive re-assessment of BNS's hybrid operating environment would entail a sustained reduction in vulnerabilities around Canadian household indebtedness and the elevated housing market, and a decline in BNS's emerging markets exposure.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
BNS's legacy senior debt, derivative counterparty ratings (DCRs) and long-term deposit ratings are one notch higher than its Long-Term Issuer Default Rating (IDR) to reflect the exclusion of these obligations from bail in, and the protection that could accrue to holders of these instruments from more junior resolution debt and equity buffers, as recognized under Fitch's criteria. BNS's short-term senior obligations of less than 400 days, are at the same level of its Short-Term IDR as these are already at the top of the scale.
The subordinated debt is rated two notches below the Viability Rating (VR) for loss severity, in line with baseline notching under Fitch's criteria. The preferred stock of
Government Support Rating (GSR): Fitch has affirmed the GSRs of 'ns' for BNS, reflecting the agency's view that senior creditors cannot rely on receiving full extraordinary support from the sovereign in the event that BNS becomes nonviable. In Fitch's view, the implementation of Bank Recapitalization (Bail-in) Regime provides a framework for resolving banks that are likely to require senior creditors participating in losses, if necessary, instead and ahead of, or in conjunction with, the provision of sovereign support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Senior Preferred Debt, Derivative Counterparty Rating, Long- and Short-Term Deposit Ratings: BNS's senior preferred debt, DCR and long-term deposit ratings are primarily sensitive to changes in its Long-Term IDR. BNS's Short-Term IDR, senior debt and deposit rating is unlikely to change as this would require a multi-notch downgrade of the Long-Term IDR. The subordinated debt rating and
GSR: There is limited likelihood that the GSR will change over the foreseeable future.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
Fitch affirmed the Long-Term and Short-Term IDRs of
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Scotiabank Ireland's IDRs are sensitive to changes in BNS's IDRs or Fitch's view of BNS's ability and propensity to provide support.
VR ADJUSTMENTS
The VR of 'aa-' is assigned above the implied VR of 'a+' due to a higher weighting of the business profile.
The business profile score of 'aa-' was assigned above the 'a' category implied score due to the following adjustment reasons: market position (positive) and business model (positive).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
(C) 2024 Electronic News Publishing, source
