Overview -- Scotiabank Inverlat S.A. remains a strategically important subsidiary for its parent, the Bank of Nova Scotia. -- We are affirming our 'BBB/A-2' issuer credit ratings on Scotiabank, as well as our 'mxAAA/mxA-1+' national scale issuer credit and 'mxAAA' senior unsecured debt ratings on the bank. The outlook remains stable. -- The stable outlook reflects our expectation that Scotiabank will maintain its strong capital and adequate earnings capacity, and experience moderate growth during the next two years, with no material changes in the composition of the loan portfolio. Rating Action On Sept. 17, 2012, Standard & Poor's Ratings Services affirmed its 'BBB/A-2' issuer credit ratings on Scotiabank Inverlat S.A. We also affirmed our 'mxAAA/mxA-1+' national scale issuer credit and 'mxAAA' senior unsecured debt ratings on Scotiabank. The outlook remains stable. The stand-alone credit profile (SACP) is 'bbb+'. Rationale The ratings on Scotiabank reflects the bank's "adequate" (as our criteria define the term) business position, "strong" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity. We view Scotiabank as strategically important to its parent, the Bank of Nova Scotia (BNS; AA-/Negative/A-1+), but we don't incorporate any notches of support in this regard at this time. The sovereign foreign currency credit ratings on Mexico (foreign currency BBB/Stable/A-2, local currency A-/Stable/A-2) limit the issuer credit ratings on Scotiabank. Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in Mexico is 'bbb'. We believe that the main risk for banks operating in Mexico is economic risk, resulting from the population's low income level (from a global perspective) and the decline in payment capacity because of low levels of domestic savings. Mexico's banks also face challenges associated with lending within a legal framework that is still establishing a track record of creditor rights. However, underwriting standards have improved, and there currently are no asset bubbles in Mexico's economy. Industry risk is not as high because of conservative regulation, but supervision still needs to be strengthened. Healthy competitive dynamics fuels the lending system, funding is based on stable deposits, and the domestic debt markets are expanding rapidly. We classify the Mexico's government as "supportive" to its banking system, based on the support it had provided to banks in the past and our belief that it has the capacity to help banks withstand problems. Scotiabank's strong market position in business segments that are strategic for its parent, and its good diversification, which results from its loan portfolio's retail orientation, continue to support its business profile. As of June 2012, the bank's mortgage and consumer loans represented 39% and 15%, respectively, of the total loan portfolio. The bank's business stability mainly reflects its good presence within the retail segment. As of March 2012, Scotiabank's market share in the mortgage segment was 11%, which positioned it as the fifth largest bank in Mexico's banking system. In addition, the bank ranks second in the country's auto loan business, with a market share of 19%. Although Scotiabank's branch network is smaller than its main competitors', the bank has a presence throughout the country. Management and strategy are positive rating factors. The bank employs a conservative strategy, which includes maintaining an average loan to deposits of about 90% since 2008, despite a high exposure to the mortgage segment. We assess Scotiabank's capitalization as "strong." As of December 2011, Standard & Poor's risk adjusted capital (RAC) ratio was 12.6%. We expect the RAC ratio to decline slightly to about 12.2% during the next 18 months to 24 months. Our assumption takes into consideration our base-case scenario, which assumes a loan growth of 14% in both 2012 and 2013, stable net interest margin, and a dividend payout ratio in line with the last year's. We view the capital quality as strong, since the bank's capital base solely consists of paid-in capital and retained earnings, with no hybrid instruments. The bank's portfolio mix, which has a considerable orientation toward personal loans, has resulted in good profitability ratios. We estimate that Scotiabank's core earnings will represent about 1.5% of its average adjusted assets during the next 18 months. The three-year average earnings buffer is in the 200 basis-point range, reflecting the bank's adequate earnings capacity, in our opinion. We assess Scotiabank's risk position as "adequate." We expect that the bank will maintain its portfolio composition in terms of business lines, with moderate growth and major focus in mortgages and auto loans, as well as credit cards and small and medium-sized companies. We view positively the balance between commercial and personal loans and secured and unsecured loans in the loan portfolio. Given the bank's retail orientation, it does not have a significant client concentration. Scotiabank has had credit losses in line with its main peers'. We expect nonperforming assets to remain at approximately 2.7%-2.8% during the next 12 months to 18 months. The bank's risk concentrations and risk diversification is adequate, in our view. However, Scotiabank's RAC ratio after diversification is lower than the 12.6% before adjustments, reflecting adjustments from geographic concentration. We believe that complexity is not an issue for Scotiabank, since it is not an issue for the industry in general. Scotiabank's funding is "average" and its liquidity position is "adequate", in our view. Customer deposits comprise approximately 90% of its funding base and individuals provide 60% of its funding, which both strengthen its stability. Loans to customer deposits represented an adequate 85% as of June 2012 and are similar to the bank's peers' average of 84.6%. We consider the bank's liquidity to be "adequate." As of year-end 2011, Scotiabank's liquid assets (cash, not restricted and trading securities) represented about 14% of the balance sheet and largely covered short-term wholesale funding (wholesale debt repurchase agreements and due to banks). Based on our group rating methodology, we consider Scotiabank as a strategically important subsidiary for BNS. Scotiabank benefits from its parent's expertise, experienced management team, underwriting practices, and information technology platform. However, we do not incorporate any notches of support because Scotiabank's SACP is one notch higher than the sovereign foreign-currency rating on Mexico. This reflects our opinion that economic factors that could trigger a sovereign stress scenario would erode the bank's fundamentals. Outlook The stable outlook reflects our expectation that Scotiabank will maintain its strong capital, with a RAC ratio of 12%-12.5% during the next 12 months to 18 months, and adequate earnings capacity. We also expect moderate growth during the next two years, with no material changes in the composition of the loan portfolio. In addition, we believe that the bank's core earnings to average adjusted assets will be about 1.5% during this time. A downgrade is unlikely at this time because of the bank's SACP. However, if the bank's SACP deteriorates because its capital falls to less than our expectations or its risk position weakens, we would add notches of support because of its status as a strategically important subsidiary of BNS. Our ratings on Scotiabank move in tandem with those on the sovereign. Ratings Score Snapshot Issuer Credit Rating BBB/Stable/A-2 SACP bbb+ Anchor bbb BICRA economic risk score 5 BICRA industry risk score 3 Business Position Adequate (0) Capital and Earnings Strong (+1) Risk Position Adequate (0) Funding Average (0) Liquidity Adequate Support +3 GRE Support 0 Group Support +3 Sovereign Support 0 Additional Factors -4 Related Criteria And Research -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- BICRA On Brazil Revised To Group '4' From Group '5', Nov. 9, 2011 -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 Ratings List Ratings Affirmed Scotiabank Inverlat S.A. Counterparty Credit Rating BBB/Stable/A-2 Caval - Mexican Rating Scale mxAAA/Stable/mxA-1+ Senior Unsecured mxAAA Certificate Of Deposit BBB/A-2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.