Credit rating agencies are giving their blessing to Bank of Nova Scotia’s (TSX:BNS) acquisition late last week of a failed Puerto Rican bank.

Following Friday’s news that Scotiabank is buying the banking operations of R-G Premier Bank of Puerto Rico, DBRS Ltd. said that the move will not have a material impact on the bank’s current earnings and capital; that credit risk is manageable, given the loss-sharing agreement with the Federal Deposit Insurance Corp.; and, therefore, there are no rating implications for Scotia.

This view is echoed by Moody’s Investors Service, which also sees no impact on the bank’s ratings.

DBRS says that it views this transaction “as consistent with Scotiabank’s desire to achieve scale in its targeted markets. R-G Premier Bank, which has 6% deposit market share, significantly adds scale to BNS’s existing Puerto Rico operations of Scotiabank de Puerto Rico, which has a 3% market share.

“From the perspective of BNS as a whole, the transaction is small, since it will only increase BNS’ assets by about 1%. However, the deal meaningfully strengthens BNS’ banking presence in Puerto Rico, where it has operated for 100 years,” notes Moody’s, adding that it believes that this transaction is consistent with Scotia’s expansion strategy, which has focused on building scale in select international markets, including in the Caribbean.

Moreover, as in other FDIC deals, this transaction is expected to have limited downside credit risk, DBRS notes. Under the deal, the FDIC is covering 80% of loan losses.

Moody’s points out that in addition to R-G Premier, the FDIC brokered the sale of two other Puerto Rican banks at the same time, “which will materially rationalize the island’s banking sector since the other acquirers, like BNS, already had a banking presence on the island. That could boost the efficiency and profitability profiles of the island’s remaining banks, including BNS.”

The one downside risk that the raters do see is the weak Puerto Rican economy. Moody’s notes that the Puerto Rican economy has performed very poorly over the past few years, “which will likely continue to negatively impact the banks’ credit metrics for some time, making robust profitability unlikely in the near-term.”

IE