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TEXT-S&P affirms Scotiabank Inverlat's 'BBB/A-2' ratings
September 17, 2012 / 7:42 PM / 5 years ago

TEXT-S&P affirms Scotiabank Inverlat's 'BBB/A-2' ratings

     -- 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+'.

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 

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 

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 All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 

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