DBRS Confirms Bank of Nova Scotia Ratings at AA and R-1 (high)

DBRS has today confirmed the ratings and trends of Bank of Nova Scotia (Scotiabank or the Bank) and its related entities, including Scotiabank’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high). All trends are Stable.

The ratings are supported by Scotiabank’s diversified earnings profile (balanced contributions from Domestic Banking, International Banking and Scotia Capital), a strong cost-control culture and a favourable financial risk profile. Scotiabank remains focused on its strategy of diversification. During the last 18 months, the Bank has made strategic acquisitions and invested for organic growth, both domestically and internationally, which enhances geographic and business diversification.

DBRS expects investments made in the Domestic Banking segment, including expanding the distribution network and upgrading the technology platforms, will position this segment for continued earnings stability and profitability that will contribute to a diversified earnings profile. De novo branch building is another strategy that the Bank has been employing to strengthen its distribution footprint. During the 2007 fiscal year, Scotiabank opened 35 branches in Canada. The most significant purchase was Dundee Bank of Canada and an 18% equity investment in DundeeWealth Inc. for $608 million. The former has important relationships for deposit gathering and the latter gives Scotiabank exposure to multiple facets of wealth management. DBRS expects the Bank to continue to make market share gains in select areas.

International Banking contributed 31% of earnings in fiscal year 2007, which DBRS believes is balanced relative to the rest of Scotiabank’s operations. Internationally, Scotiabank has spent more than $1.4 billion on acquisitions since the beginning of calendar 2007, with the largest being Banco del Desarrollo (Desarrollo) in Chile. (Please see the DBRS press release of August 31, 2007, for further details.) Desarrollo will advance Scotiabank closer to its objective to have a minimum 10% market share in countries in which it desires to operate.

On May 13, 2008, the Bank announced it has entered into an agreement to acquire an additional 20% stake in Scotiabank Perú, bringing Scotiabank’s ownership to 98%. Scotiabank Perú is the third largest bank in Peru, with 15% market share in savings. DBRS believes Scotiabank’s investments in the Caribbean, Central America, South America and Asia have inherently higher risk profiles relative to developed markets, resulting in additional political, economic, currency and operational risks.

With the relative importance of international operations expected to increase, given more positive growth prospects relative to domestic banking, DBRS believes the risk profile of the Bank will increase in the medium term. DBRS considers geographic diversification and long-standing experience in emerging markets to somewhat temper economic and political risks that may arise from time to time.

Scotiabank has a disciplined cost culture that is a competitive advantage among its Canadian banking peers and is a contributing factor in earnings growth, especially as revenue growth slows. With strong capital ratios, which provide flexibility to manage its growth strategy (organically and/or acquisitions) and the ability to absorb unforeseen shocks, the Bank is well positioned for a weakening credit environment.

Scotiabank’s long-term deposits and senior debt rating, at AA, is composed of its Intrinsic Assessment at AA (low) and its Support Assessment at SA2 (reflecting the expectation of systemic and timely external support by the government of Canada). The SA2 results in a one-notch rating benefit to the Intrinsic Assessment.

With its headquarters in Toronto, Bank of Nova Scotia has a full-service retail banking operation and wealth management in Canada, international retail banking franchises (Mexico, the Caribbean, Central America and South America) and a full-service domestic corporate and investment bank, with global precious metal capabilities. Scotiabank is the most internationally diversified of Canada’s major banks.

The Bank has four segments: Domestic Banking, International Banking, Scotia Capital and Other, which represent 38%, 31%, 28% and 3% of adjusted net income in 2007, respectively. Over time, the objective is to generate 40%, 30% and 30% of earnings, respectively, from each of the three operating segments, with an emphasis on retail and commercial operations.

Domestic Banking includes retail, small business, commercial and wealth management businesses. International Banking incorporates Scotiabank’s 97% ownership of Scotiabank Mexico (Mexico’s sixth largest bank), franchises in the Caribbean and Central America (including Jamaica, Puerto Rico, the Bahamas, the Dominican Republic, Trinidad and Tobago, Costa Rica and El Salvador), South America (including Chile, Venezuela and Peru) and Asia. Scotia Capital is a full-service domestic corporate and investment bank and a niche player in the United States and Europe, and it has a leading global precious metal operation through ScotiaMocatta.

Note:
All figures are in Canadian dollars unless otherwise noted.
DBRS ratings also apply to Scotia Mortgage Corporation, Montreal Trust Company of Canada and National Trust Company, which are unconditionally guaranteed by Bank of Nova Scotia.