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Rating Action:

Moody's confirms A3 deposit ratings of Scotiabank Inverlat; assigns negative outlook

 The document has been translated in other languages

28 Jun 2016

Mexico, June 28, 2016 -- Moody's de México today confirmed the A3 global scale and Aaa.mx Mexican National Scale deposit ratings of Scotiabank Inverlat, S.A. (Scotiabank). Moody's also confirmed Scotiabank's baa2 baseline credit assessment (BCA) and baa1 adjusted BCA. The outlook is negative in line with the negative outlook on Mexico's A3 rating.

Scotiabank's long-term counterparty risk assessment of A3(cr) was also confirmed.

In addition, Moody's confirmed the long-term issuer ratings of Scotia Inverlat Casa de Bolsa, S.A. de C.V. (Scotia Casa de Bolsa) at Baa1 in the global scale and Aa1.mx in the Mexican National Scale, in line with the confirmation of Scotiabank's baa1 adjusted BCA. The outlook on Scotia Casa de Bolsa's ratings is stable.

This action concludes the rating reviews on Scotiabank initiated on 4 April 2016.

A detailed list of affected ratings is provided below.

RATINGS RATIONALE

CONFIRMATION OF DEPOSIT RATINGS WITH A NEGATIVE OUTLOOK

The confirmation of Scotiabank's deposit ratings reflects Moody's continued assessment of a high likelihood that the Mexican government would support this systemically important institution should it face severe financial stress. The confirmation also includes Moody's assessment of continued high affiliate support from Scotiabank's parent Bank of Nova Scotia (BNS, deposits Aa3/senior unsecured debt Aa3 stable, BCA a2).

Moody's continues to regard the government as having a high willingness to support the country's banks to assure banking system stability and investor confidence. Moody's assessment incorporates the government's track record of support, the banking system's reliance on domestic deposit funding, and the absence in Mexico of an operational bank resolution regime based on the principle of bailing-in bank creditors.

Moody's assessment of government support results in one notch of uplift from the bank's baa1 adjusted BCA, to an A3 deposit rating, which is aligned to the government's own bond rating. As a result of the negative outlook on the government's bond rating, however, the outlook on Scotiabank's deposit ratings is also negative.

Moody's also incorporates a high probability of support for Scotiabank from its Canadian parent, which results in one notch of ratings uplift from Scotiabank's standalone baa2 BCA to an adjusted BCA of baa1. Moody's believes there is a high likelihood that BNS would provide support to its Mexican subsidiary in the context of its presence in the Pacific Alliance, as well as in NAFTA.

CONFIRMATION OF baa2 BCA

Moody's confirmation of Scotiabank's baa2 BCA incorporates its good asset quality, supported by an ample capitalization and reserve coverage, which will allow the bank to absorb increased asset risks that may arise from a less favorable operating environment. Scotiabank also benefits from ample access to low-cost core funding and robust profitability despite strong competition from its larger peers in Mexico.

Scotiabank maintains one of the lowest levels of problem loans in Mexico as a result of a more conservative loan mix geared towards commercial lending and secured consumer financing, including residential mortgages and car financing. The bank's ratio of nonperforming loans plus write-offs as a percentage of gross loans is the lowest among the seven largest banks in Mexico, at 3.5% as of March 2016, and almost 200 basis points below its peers' average. The bank's ample and high quality capitalization, measured as tangible common equity (TCE) relative to risk weighted assets (RWAs) at 12.1%, compares well with that of peers, as a result of a policy of high earnings retention. The bank is nevertheless challenged by its very high loan growth in the past years and its high and increasing single-borrower concentrations, which resulted from the recent shift back to commercial lending, and away from consumer. The bank's exposure to the troubled energy sector and to Petróleos Mexicanos (Baa3 negative), is nevertheless among the lowest in the Mexican banking system.

Scotiabank faces strong competition in its targeted customer segments, as reflected by the large franchise and market share gaps between Scotiabank and the dominant Mexican banks. However, the bank focuses on specific lending products and on service quality to lever its access to retail depositors as a point of differentiation relative to its larger and more diversified peers. This strategy results in slightly lower net interest margins than peers' and higher operating costs, but is supported by lower provisioning needs, yielding profitability levels that are largely in line with that of its competitors. The bank funds its loan book almost entirely with stable core deposits, about 60% of which are sourced from retail customers.

CONFIRMATION OF SCOTIA CASA DE BOLSA'S RATINGS WITH A STABLE OUTLOOK

The confirmation of Scotia Casa de Bolsa's ratings with a stable outlook is in line with the confirmation of Scotiabank's adjusted BCA at baa1. Given the limited financial strength of Scotia Casa de Bolsa on a standalone basis, its issuer ratings are derived from Scotiabank's baa1 adjusted BCA and Moody's assessment of a very high support probability from the bank to its sister brokerage house. There is no further downward pressure on Scotiabank's baa1 adjusted BCA at this time as a result of Moody's continued assessment of high affiliate support from BNS.

WHAT COULD CHANGE THE RATINGS UP OR DOWN

While there is no upward ratings pressure at this point, Scotiabank's deposit outlooks will likely be stabilized if and when the government outlook returns to stable.

Scotiabank's baa2 BCA would face downward pressure if (i) asset risks rise, driven by further increases in single borrower concentrations, or continued high loan growth, that result in sizable credit losses; (ii) a capitalization consistently below 11% (measured as TCE/RWA); or (iii) a deterioration in the quality or growth potential of the bank's core deposit base. Downward pressure could be exacerbated by a slowdown in or further shock to the Mexican economy.

Scotiabank's deposit ratings would be downgraded if Mexico's government bond rating, which currently carries a negative outlook, is downgraded.

LIST OF AFFECTED RATINGS

The following ratings were confirmed:

Scotiabank Inverlat, S.A.

Baseline credit assessment of baa2

Adjusted baseline credit assessment of baa1

Long-term global local currency deposit rating of A3, negative outlook

Long-term foreign currency deposit rating of A3, negative outlook

Long-term Mexican National Scale deposit rating of Aaa.mx

Long-term counterparty risk assessment of A3(cr)

Scotia Inverlat Casa de Bolsa, S.A. de C.V.

Long-term global local currency issuer rating of Baa1, stable outlook

Long-term Mexican National Scale issuer rating to Aa1.mx

The principal methodology used in rating Scotiabank was Banks published in January 2016. The principal methodology used to rate Scotia Casa de Bolsa was Global Securities Industry Methodology published in May 2013. Please see the Ratings Methodologies page on www.moodys.com.mx for a copy of these methodologies.

The period of time covered in the financial information used to determine Scotiabank's and Scotia Casa de Bolsa's ratings is between 1 January 2011 and 31 March 2016 (source: Comisión Nacional Bancaria y de Valores).

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_189530.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's information.

The ratings have been disclosed to the rated entities prior to public dissemination.

A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx.

The date of the last Credit Rating Action on Scotiabank was 4 April 2016.

The date of the last Credit Rating Action on Scotia Casa de Bolsa was 13 June 2016.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.mx.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity.Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

This Rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on www.moodys.com.mx for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com.mx for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see our website www.moodys.com.mx for further information.

Please see www.moodys.com.mx for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

The ratings issued by Moody's de Mexico are opinions regarding the credit quality of securities and/or their issuers and not a recommendation to invest in any such security and/or issuer.

Please see the ratings tab on the issuer/entity page on www.moodys.com.mx for additional regulatory disclosures for each credit rating.

Felipe Carvallo
Vice President - Senior Analyst
Financial Institutions Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

M. Celina Vansetti
MD - Banking
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's confirms A3 deposit ratings of Scotiabank Inverlat; assigns negative outlook
No Related Data.
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