In a research note released today, Standard & Poor’s says that it expects the bank to continue to deliver strong earnings.

The report says that Scotiabank’s current credit ratings “reflect its market position as one of five dominant universal banks in Canada, its broad business mix, geographic diversification, and the efficiency of its operations.”

S&P says that, over the past three years, 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 (excluding charges related to Argentina).

“The bank has a track record of strong and consistent earnings performance and has a very strong capital base even when risk-adjusted for higher risk activities,” S&P notes.

Looking ahead, S&P maintains a stable outlook on the bank, reflecting its expectation that, “the bank will continue to maintain its track record of solid earnings performance, very strong level of capital adequacy, and managable asset quality. This assessment is supported by Scotiabank’s strong cost-control discipline and solid business franchises in Canada, the U.S., and the Caribbean, which together comprise about 80% of its earnings assets.”

“The personal and commercial bank continues to contribute to Scotiabank’s solid earnings base,” S&P says, noting, “The bank’s wholesale operation (Scotia Capital) has a larger exposure to corporate loans relative to the size of the bank’s total loan portfolio, and has been a prominent player in the U.S. leveraged-lending market. This portfolio continues to stabilize as the net impaired loans and provisions for credit losses continue to decline. With respect to Scotiabank’s international operations, the Caribbean subsidiaries continues to perform well, and its Mexican and Chilean subsidiaries continue to gather momentum.”

However S&P says, “These strengths are offset somewhat by the higher risk profile of Scotiabank’s corporate lending activities and investments in its international banking subsidiaries relative to its peers.”

According to the ratings agency, some of the more significant challenges facing Scotiabank include:

  • the appreciation of the Canadian dollar;
  • compression in interest margins and a lack of corporate loan demand in the U.S.; and
  • strengthening the bank’s wealth management business, which continues to lag its peer group as measured by revenues and assets under management.

    S&P says Scotiabank remains well positioned to expand its business activities internationally given its very strong capital ratios, high quality of capital, and the significant appreciation in the Canadian dollar since the beginning of 2003, it says.

    “Although the bank has expressed interest in making a sizable retail acquisition in the U.S., this plan will be tempered by the high cost and the lack of expense savings of acquisition targets in the U.S., as well as the major consolidation opportunity that could present itself on the domestic front,” it concludes