STANDARD & POOR'S Ratings Services has revised the outlook on The Bank of Nova Scotia (Scotiabank) and its subsidiaries to positive from stable. At the same time, the ratings outstanding on Scotiabank and its subsidiaries, including the 'A+' long-term counterparty credit ratings, were affirmed.
"Scotiabank has established a track record of strong and consistent earnings performance, and has a very strong capital base even when risk adjusted for higher risk activities," said Standard & Poor's credit analyst Donald Chu, in an interview, last September.
These strengths are somewhat offset by the higher risk profile of the bank's corporate lending activities and investments in its international banking subsidiaries. Notwith-
standing, even with the significant provisions for loan losses in 2002 and early 2003, the bank was able to earn through the difficult credit environment. Also, the overall risk profile of Scotiabank's international exposure has been reduced now that Argentina is behind the bank.
Scotiabank's market position reflects that of one of the five dominant universal banks in Canada. It has a broad business mix, is geographically well diversified, and has very efficient operations. Based on the past three years' results, excluding charges related to Argentina, about 46 per cent of the bank's earnings were derived from its domestic banking operations, 25 per cent from global wholesale or corporate and investment banking, and 26 per cent from its international banking operations.
Despite the very competitive market, the personal and commercial bank, both domestically and in the Caribbean, continues to contribute to Scotiabank's solid earnings base. Scotiabank Jamaica headed by William "Bill' Clarke posted an incredible J$5.5 billion in profits for the year and continues to go from strength to strength.
The bank's wholesale operations (Scotia Capital) has a larger exposure to corporate loans relative to the size of the bank's total loan portfolio, and it has been a prominent player in the U.S. leveraged lending market. A number of initiatives, however, have been taken to reduce the risk profile of the corporate loan book including lower hold limits, a one-third reduction in capital to support the U.S. business, and a more disciplined approach to credit. This portfolio continues to stabilise as the net impaired loans and provisions for credit losses continue to decline.
With respect to Scotiabank's international operations, the Caribbean continues to perform well, and its Mexican and Chilean subsidiaries continue to gather momentum. In 2003, the bank increased its equity interest in its Mexican subsidiary, Inverlat, to 91 per cent, and Scotiabank is currently negotiating the buyout of the remaining minority shareholders.
Some of the more significant challenges facing Scotiabank include strengthening the bank's wealth management business, which continues to lag its peer group as measured by revenues and assets under management; increasing the level of fee-based or noninterest income to reduce the pressure on interest margins (although Scotiabank's are currently the best in its Canadian peer group); and generating an adequate return from Asian and Latin American investments, which remain exposed to economic and political risk.
