Standard & Poor’s Ratings Services has revised its outlook on the Bank of Nova Scotia to positive from stable. At the same time, the ratings outstanding on Scotiabank and its subsidiaries were affirmed.

“Scotiabank has established a track record of strong and consistent earnings performance, and has a very strong capital base even when risk adjusted for higher risk activities,” said Standard & Poor’s credit analyst Donald Chu.

S&P says these strengths are somewhat offset by the higher risk profile of the bank’s corporate lending activities and investments in its international banking subsidiaries, it says. However, it notes that even with the significant provisions for loan losses in 2002 and early 2003, the bank was able to earn through the difficult credit environment. Also, the overall risk profile of Scotiabank’s international exposure has been reduced now that the Argentina exposure is behind the bank.

S&P notes that Scotiabank has a broad business mix, is geographically well diversified, and has very efficient operations. Based on the past three years’ results, excluding charges related to Argentina, about 46% of the bank’s earnings were derived from its domestic banking operations, 25% from global wholesale or corporate and investment banking, and 26% from its international banking operations.

It cautions that the bank’s wholesale operations has a larger exposure to corporate loans relative to the size of the bank’s total loan portfolio, and it has been a prominent player in the U.S. leveraged lending market.

“A number of initiatives, however, have been taken to reduce the risk profile of the corporate loan book including lower hold limits, a one-third reduction in capital to support the U.S. business, and a more disciplined approach to credit. This portfolio continues to stabilize as the net impaired loans and provisions for credit losses continue to decline,” it reports.

S&P says that Scotiabank’s Caribbean arm continues to perform well, and its Mexican and Chilean subsidiaries are gathering momentum.

“Some of the more significant challenges facing Scotiabank include strengthening the bank’s wealth management business, which continues to lag its peer group as measured by revenues and assets under management; increasing the level of fee-based or noninterest income to reduce the pressure on interest margins (although Scotiabank’s are currently the best in its Canadian peer group); and generating an adequate return from Asian and Latin American investments, which remain exposed to economic and political risk.”