The move by Toronto-based Bank of Nova Scotia to take a controlling stake in a Chilean credit card business announced on June 20 is negative for its credit profile, according to Moody’s Investors Service.
Earlier this month, Moody’s altered its outlook on Scotiabank, saying that the bank appears to have increased its appetite for risk. And this latest deal — that sees the bank take a 51% stake in the financial services unit of a Chilean retailer for $300 million — seems to confirm that opinion. “The acquisition, although financially immaterial, is credit negative because it increases [Scotia’s] unsecured consumer risk and shifts its business mix toward increased reliance on international earnings,” Moody’s says.
“Chile, and other countries where [Scotiabank] is active, has a more volatile operating environment than [Scotiabank’s] home market of Canada. The bank also has a weaker market presence and pricing power in most of these countries relative to its Canadian operations. Therefore, increased reliance upon earnings from outside of Canada is credit negative for [Scotiabank] overall,” it says.
The rating agency recently shifted its outlook on the bank to negative, taking note of several recent developments, including the bank’s sale of much of its stake in CI Financial Corp., and the likely redeployment of that capital to increase international exposure. “In our opinion, the credit profiles of [Scotia’s] international operations dilute the strong credit profile of its domestic Canadian operation, and therefore a shift in this direction is credit negative,” Moody’s says.