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Investing.com -- On Monday, Fitch Ratings affirmed the Long-Term Issuer Default Rating (IDR) and Short-Term IDR of the Bank of Nova Scotia (NYSE:BNS) at ’AA-’ and ’F1+’, respectively, with a stable outlook.
The ratings reflect the bank’s operating environment constraints, largely influenced by its weighted average operating environment assessment of ’aa-’. This assessment takes into account the risk and income contributions from key markets such as Canada, the U.S., Chile, Mexico, Peru, and Colombia. Any changes in these components or a shift towards higher risk geographies could impact BNS’s ratings.
BNS’s strong retail banking market position in Canada, with a significant share in loans and customer deposits, supports the ratings. The bank serves more than 11 million customers in Canada and over 12 million in Mexico and other Latin American countries, offering a broad spectrum of retail and commercial banking, wealth management, and capital markets services.
BNS is progressing well with its five-year strategic plan launched in December 2023. The plan focuses on four key areas: growing priority businesses, deepening client relationships, enhancing customer experiences, and fostering a winning team culture. As part of this plan, BNS acquired a 14.9% stake in KeyCorp (NYSE:KEY) and streamlined its Latin America operations by transferring banking operations in Colombia, Costa Rica, and Panama to Davivienda.
Fitch noted that new U.S. tariffs could impact BNS more than its Canadian peers due to its franchise in Mexico. The bank is currently assessing sectors that could be directly affected by the tariffs and developing mitigation strategies. Economic weakness in both Mexico and Canada could potentially affect BNS’s asset quality.
BNS’s risk appetite is considered higher than its peers due to its greater exposure to emerging markets. The bank’s international banking segment contributes a significant share to impaired loans, with 66% of gross impaired loans in 2Q25, despite representing roughly 23% of total loans. The bank is working on streamlining its international banking offerings and market segmentation to improve overall segment results and loan performance.
The gross impaired loan ratio increased to 90bps in 2Q25, up from 83bps in 2Q24, primarily due to formations in the Canadian retail and commercial book. BNS’s credit quality metrics have historically been less favorable than domestic peers due to its larger presence in emerging markets.
BNS’s revenue has improved as a result of the bank’s focus on loan portfolio optimization and margin improvement. However, Fitch expects some pressure on profitability in the near term as the bank continues to realign its balance sheet and business lines to achieve higher returns. To mitigate the risk of tariffs on the economies in its network, BNS has increased its level of performing provisions.
BNS’s common equity Tier 1 (CET1) ratio remains strong at 13.2% at 2Q25, above the regulatory minimum of 11.5%. Fitch positively views this capital buffer during this time of economic uncertainty. BNS is focused on disciplined capital allocation to strengthen its earnings and internal capital generation.
Loans as a share of customer deposits improved to 111.5% in 2Q25 from 112.8% in 2Q24. This improvement was driven by BNS refocusing some of its lending activities which slowed down loan growth relative to deposits. BNS has implemented various initiatives across all its segments to gather more deposits from bank clients.
Fitch does not foresee a ratings upgrade in the foreseeable future as the rating is constrained by the assessment of BNS’s weighted operating environment. Any positive re-assessment would entail a sustained reduction in vulnerabilities related to Canadian household indebtedness and the elevated housing market, as well as a decline in BNS’s emerging markets exposure.
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