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
KEY CREDIT RATING CONSIDERATIONS
Scotiabank's credit ratings and Stable trends are underpinned by its highly diversified franchise and earnings. The Canadian operations of the third-largest bank in
The credit ratings also consider the challenging macroeconomic and geopolitical environments, which could lead to an adverse impact on profitability and asset quality. Morningstar DBRS remains concerned about the combination of highly leveraged Canadian consumers, elevated home prices, particularly in the greater
CREDIT RATING DRIVERS
Over the longer term, the Bank's credit ratings would be upgraded if Scotiabank were to continue to build the depth and scale of its franchise, resulting in a sustained improvement in financial performance without substantially increasing its risk profile.
Conversely, 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. Additionally, a sustained deterioration in earnings or asset quality, especially caused by deficiencies in risk management or an increase in risk profile, would also lead to a downgrade of the credit ratings.
CREDIT RATING RATIONALE
Franchise Combined
The credit ratings are underpinned by the Bank's scale and highly diversified business, product, and geographical mix that provides significant versatility to respond to changing market opportunities. Scotiabank's strong Canadian franchise, albeit underrepresented in
Earnings Combined
With strong operating efficiency, Scotiabank generates solid underlying earnings, which contribute to the Bank's ability to absorb credit losses. In a challenging operating environment, adjusted net income decreased 21.5% year over year (YOY) to
Risk Combined
Scotiabank's risk profile is viewed as conservative, exhibited by its 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 conservative underwriting and knowledge gleaned from its long operating history in emerging markets. The Bank has maintained a favourable business mix, with 73% of its IB loan portfolio secured. Nevertheless, asset quality metrics have started normalizing from unsustainably low levels; the gross impaired loans ratio increased 6 bps QOQ to 80 bps in Q1 2024, driven by higher impairments both in Canadian banking and IB. Morningstar DBRS expects a continued modest deterioration in credit quality in F2024. The Bank's strategy refresh focuses on more targeted, slower loan growth to ensure returns are commensurate with risk, including less emphasis on monoline customers.
Funding and Liquidity Combined
Overall, Scotiabank has a solid funding and liquidity profile, which benefits from a substantial deposit base. However, the Bank has a heavier reliance on higher-cost wholesale funding (at 20.3% of total assets as at Q1 2024) than its peers. A focus of the strategy refresh is to grow core deposits and further reduce its loan-to-deposit ratio of 110% (as at Q1 2024), which remains the highest among the Bank's peers. Wholesale funding is well managed and diversified by instrument, currency, program, tenor, and source/market. Scotiabank also ensures that its IB subsidiaries are funded in their local markets. In addition, liquidity at Scotiabank remains strong as it reported all bank Q1 2024 liquidity coverage ratio of 132% (
Capitalization Combined
Morningstar DBRS views the Bank's capitalization as strong, reflecting current capital levels as well as its significant internal capital generation. Affected largely by the 2.5% phase-in increase in the standardized capital floor, the CET1 ratio decreased approximately 10 bps QOQ to 12.9% in Q1 2024 but 190 bps above the regulatory minimum of 11.5% for Domestic Systemically Important Banks. Morningstar DBRS expects the Bank will maintain the CET1 ratio at 12% or above in the medium term. In Q1 2024, Scotiabank's risk-based total loss-absorbing capacity ratio was 28.9%, comfortably above the regulatory threshold of 25.0%. The Bank reported a leverage ratio of 4.3% in Q1 2024 that was above the regulatory minimum of 3.5%.
Further details on the Scorecard Indicators and
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors 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 Risk Factors in Credit Ratings (
Notes:
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
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 dbrs.morningstar.com.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
These credit ratings are endorsed by
The last rating action on this issuer took place on
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.
For further information on Morningstar DBRS historical default rates published by the
For further information on Morningstar DBRS historical default rates published by the
Lead Analyst: Shokhrukh Temurov, CFA, Vice President
Rating Committee Chair:
Initial Rating Date:
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