Moody’s Investors Service affirmed the ratings and outlook of the Bank of Nova Scotia following the announcement that the bank reached an agreement to acquire 80% of Peru’s Banco Wiese Sudameris from Italy’s Banca Intesa Spa.

Scotiabank will merge BWS with its Peruvian subsidiary, Banco Sudamericano, in which it currently holds a 35% stake. Scotiabank will own 80% of the newly merged bank, with Banca Intesa retaining a 20% interest.

In affirming the ratings, Moody’s noted that the BWS/Banco Sudamericano combination will hold an 18% deposit share, making it the third largest bank in Peru. This standing indicates that the merged institution will enjoy a level of market presence that more closely resembles that of Scotiabank’s Canadian and Caribbean franchises.

In the past, Moody’s has expressed concern about the low market presence at Scotiabank’s other Latin American franchises. In Moody’s opinion, small banks with low franchise value in volatile economies are more susceptible to periods of stress.

Moody’s stated that this pending acquisition will push Scotiabank’s equity investment in Latin America above 10% of its tangible common equity, an exposure pinpointed in prior research as being as a source of downward rating pressure. While the rating agency views this exposure as a concentration risk, it does not result in immediate negative rating pressure because the correlation between the bank’s Mexican subsidiary, Scotiabank Inverlat and its other Latin American subsidiaries is declining as Mexico’s integration with the North American economy deepens. Nonetheless, additional acquisitions in Latin America or Mexico would increase Scotiabank’s concentration risk in these two regions and could ultimately result in a downgrade of Scotiabank’s bank financial strength rating, Moody’s notes.

Upward rating pressure would likely emerge if Scotiabank divested from corporate banking outside Canada, where its competitive advantage is low, and instead focused its corporate banking unit solely on its home Canadian base. Negative rating pressure could emerge if asset quality deteriorates beyond expectations. The deterioration would need to be of an order such that approximately one year’s earnings would be insufficient to address the asset quality problems.