Monday, April 09, 2007

DBRS Confirms Scotiabank Rating

Investment Executive, James Langton, 9 April 2007

Scotiabank’s ratings are supported by its diversified earnings profile, with balanced contributions from domestic banking, international banking and Scotia Capital, a strong cost-control culture and a favourable financial-risk profile, the rating agency says.

“Over the past 18 months, Scotiabank has continued to execute on its acquisition strategy. Strategic international purchases include Corporación Interfin (parent of Banco Interfin) in Costa Rica, the remaining interest in Banco Sudamericano and Banco Wiese Sudameris in Peru, Citibank’s retail banking business in the Dominican Republic and 24.99% of Thanachart Bank in Thailand,” DBRS says, adding that Scotiabank’s objective is to have a minimum 10% market share in countries in which it desires to operate.

International operations contributed 30% of earnings in fiscal year 2006, which is balanced relative to the rest of Scotiabank’s operations. DBRS suggests that the relative importance of international operations is expected to increase, as they hold more positive growth prospects than domestic banking.

It believes the risk profile of the bank will increase in the medium term due to additional economic, currency and operational risks. However, DBRS considers diversification by country and the bank’s experience in lesser-developed markets will help to somewhat temper this risk.

Domestically, the bank has also been expanding its distribution footprint through organic branch-building and the purchases of the mortgage business of Maple Financial Group, including Maple Trust, and the Canadian operations of the National Bank of Greece, it says. DBRS expects the bank to continue to make market-share gains in select areas. “Scotiabank’s domestic-banking franchise remains the key to earnings stability as Scotia Capital can have potentially volatile returns,” it adds.

Scotiabank has one of the strongest financial-risk profiles among its peer group, which provides the bank with the flexibility to manage its growth strategy (organically and/or through acquisitions) and the ability to absorb unforeseen shocks, DBRS notes. The bank also has a competitive advantage as the cost leader among its Canadian banking competitors. DBRS does not anticipate any significant changes in the Bank’s financial-risk profile or cost management.