DBRS Tuesday confirmed its ratings and trends of Bank of Nova Scotia, citing the firm’s diversified earnings and strong spending discipline.

The rating agency said that its ratings on Scotia — including Scotiabank’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high) — are supported by its earnings diversity, which includes domestic banking, international banking and Scotia Capital. It also points out that the bank has a disciplined cost culture, which it says represents a competitive advantage among the Canadian banks, and is a contributing factor to earnings growth, particularly as revenue growth slows.

Additionally, the bank is trying to grow its undersized domestic wealth management business. “The acquisition of 37.6% of CI Financial Income Fund and E*Trade Canada in 2008, and an original 18% equity investment in DundeeWealth Inc., are steps that will give BNS leverage to the positive long-term trends in the wealth management industry as well as contribute to generating more fee-based income,” DBRS says.

“The growth in domestic wealth management may temper the relative contribution from emerging markets,” it adds, noting that the bank continues to view emerging markets as high growth areas. However, these high growth opportunities may also represent higher risk.

DBRS said it believes that “Scotiabank’s investments in the Caribbean, Central America, South America and Asia have inherently higher risk profiles relative to developed markets, resulting in additional political, economic, currency and operational risks. DBRS considers geographic diversification and long-standing experience in emerging markets to somewhat temper economic and political risks that may arise occasionally.”

The rating agency says that the bank’s financial performance has been resilient over the past six months in the face of weak economic conditions and valuation charges. “The inclusion of Banco del Desarrollo in Chile, Dundee Bank, an additional 20% stake in Scotiabank Perú, E*Trade Canada and 37.6% of CI Financial Income Fund, and organic growth were contributing factors to positive earnings,” it says.

Scotia’s loan loss provisions are at the high end, compared with the other big banks, it notes. However, with its rivals bolstering their capital positions, it’s at the low end on capital levels. “Nevertheless, the bank’s capital levels provide it with flexibility to manage its growth strategy and the ability to absorb unforeseen shocks,” DBRS says.

IE