OREANDA-NEWS. Fitch Ratings has affirmed The Bank of Nova Scotia's (BNS) long- and short-term Issuer Default Ratings (IDRs) at 'AA-' and 'F1+' respectively. The Rating Outlook is Stable.

This rating action follows Fitch's periodic review of the Canadian Banks Peer Group, which includes Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale DesJardins (CCD), National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD).

For further discussion, please refer to the Canadian Banks Peer Review Special Report to be published shortly.

KEY RATING DRIVERS
IDRS, VRs AND SENIOR DEBT

The affirmation of BNS' ratings reflects the company's good earnings performance over time accompanied by a stable earnings contribution from its international deposit and lending platforms throughout Latin America, the Caribbean, Central America, South America, and Asia. Earnings from less developed countries constituted 28% of net income as of the end of fiscal year 2015.

Fitch believes the stability of this earnings diversity has helped support the company's overall ratings. This is particularly important should there be weakness in the company's Canadian operations due to either a slowing housing market or the impact of lower oil prices on the company's commercial lending operations. BNS's earnings performance could be sheltered.

At the same time, Fitch acknowledges that BNS's operations in largely less developed international countries exposes the company to comparatively higher geopolitical and foreign exchange risk than other similarly rated Canadian or global peer banks. To date, however Fitch believes these risks have been well managed.

Further supporting today's rating action is the company's healthy Basel III Common Equity Tier 1 (CET1) ratio of 10.3%, which grew in the wake of the company's sale of its stake in CI Investments, an asset manager in Canada.

Fitch believes this additional capital should shelter the company's balance sheet in the event of economic stress, in either its domestic or international markets.

BNS - as well as other Canadian Banks - continues to benefit from a strong and diverse funding profile which is supportive to ratings.

SUPPORT RATING AND SUPPORT RATING FLOOR

The affirmation of BNS's SR of '2' and SRF of 'BBB-' reflect Fitch's view that the likelihood of support remains high for Canadian Banks due to their systemic importance in the country, significant concentration overall of Canadian banking assets, which account for over 90% of total banking assets, the large size of the banking sector with banking assets at 2.1x Canada's GDP, and Canadian Banks' position as key providers of financial services to the economy.

In Fitch's view, Canadian banking authorities, through the CDIC Act, have wide latitude to resolve a troubled bank situation including re-capitalizing the institution, creating a bridge bank, or imposing losses on creditors.

Fitch recognizes that the government's willingness to provide support for D-SIFIs in Canada has been reduced, as demonstrated by a Department of Finance consultation paper which outlines the proposed bail-in regime as banking regulators seek to protect taxpayers from the risk of a large financial institution failing. This is evidenced by the issuance of non-viable contingent capital (NVCC) instruments, resolution powers given regulatory authorities under the CDIC Act, and other initiatives that demonstrate the Canadian government's progress in reducing the propensity of state support for banks going forward.

BNS's IDRs and senior debt ratings do not benefit from support because their Viability Ratings (VRs) are all currently above their SRFs.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by BNS and its subsidiaries are all notched down from the VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.

BNS's subordinated debt is notched one level below its VR of 'aa-' for loss severity in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

The preferred securities of Scotia Capital Trust are non-cumulative preferred securities which are notched five below the VR, made up of two notches for non-performance and three notches for loss severity.

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Given the already high level of BNS's ratings, Fitch notes that potential upside for ratings is viewed as minimal over a medium-term time horizon.

Fitch notes that BNS has comparatively higher energy exposure relative to domestic peers. At fiscal year-end 2015, pipeline, oil, & gas loans amount to approximately 10% of business and government loans for BNS compared to a Canadian peer group average of 5% of business and government loans. As such, BNS's ratings would be more sensitive to growth in gross-impaired loans in its energy portfolio relative to peers.

Additionally, while the contribution to earnings from less developed markets has resulted in good and stable earnings performance for BNS and supportive to its high ratings, should currencies or economic conditions begin to fluctuate such that Fitch believes it will result in higher earnings volatility, this could also be a catalyst for a negative rating action.

Similarly, BNS' ratings would be sensitive in the event that the company makes an acquisition that either erodes regulatory or tangible capital ratios or creates the potential for more overall earnings volatility.

SUPPORT RATING AND SUPPORT RATING FLOOR

A SR of '2' incorporates Fitch's expectation that there could be some level of support for the Canadian Banks going forward, although it has been weakened given existing resolution powers and expected bail-in legislation. Although Canadian authorities have taken steps to improve resolution powers and tools, they maintain a flexible approach to bank resolution.

Fitch's assessment of continuing support for Canadian D-SIFIs has to some extent relied upon resolution powers granted regulators under the CDIC ACT as well as the potential size, structure, and feasibility of NVCC implementation. Furthermore, continued regulatory action to ensure sufficient contingent capital has been implemented for all Canadian banks.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VRs of the banks (or bank subsidiaries).

Fitch has affirmed the following ratings; with a Stable Outlook:

Bank of Nova Scotia
--Long-term IDR at 'AA-', Outlook Stable;
--Short-term IDR at 'F1+';
--Market-linked notes at 'AA-';
--Long-term deposits at 'AA-';
--Senior debt at 'AA-';
--Subordinated debt at 'A+';
--Short-term debt at 'F1+';
--VR at 'aa-';
--Support Rating at '2';
--Support Rating Floor at 'BBB-'.

Scotiabank Capital Trust
--Trust Securities at 'BBB'.