Rating agencies DBRS and Moody’s Investors Service Inc. have confirmed their ratings for the Bank of Nova Scotia, following the bank’s announcement it is buying Chilean bank, Banco del Desarrollo.

Scotiabank has signed an agreement to purchase 79% of the bank, with the intention of making a public share offering for the remaining 21%. The deal, which is subject to due diligence and regulatory approvals, is expected to close in November.

“The transaction is consistent with BNS’s strategy of growing its international operations. Chile will become one of BNS’s largest international operations, ranking after Mexico, which had $21 billion of interest-earning assets in 2006,” DBRS reports.

Likiewise, Moody’s based its decision on its opinion that the acquisition of Desarrollo enhances the value of Scotiabank’s franchise in Chile. And although the transaction will materially affect Scotiabank’s capital ratios, those ratios will remain within expectations.

“Previously, Moody’s identified rising Latin American exposure as a rating concern during a period when Scotiabank’s U.S. corporate loan portfolio was under stress,” Moody’s says in a press release. “As that exposure receded, Moody’s tolerance
for the bank’s Latin American exposure, at its current bank financial strength rating, widened.”

However, the acquisition of a bank with a weak local franchise could move ratings lower.

According to DBRS, Scotiabank will pay an estimated US$1.03 billion for the Chilean bank — approximately 6% of its common equity. “At 2.8 times book value and 13 times forward earnings, the acquisition appears fully priced,” it says. Management expects the acquisition to add 5¢ a share in the first year and 10¢ a share by the third year.

Desarrollo, which has US$5.1 billion in assets, operates 74 branches and 24 small/micro business centers focusing on mid-market commercial, SME and micro lending, as well as consumer finance. Scotiabank’s existing operation in Chile, Scotiabank Sud Americano, has US$3.5 billion in assets and 57 branches; it is more focused on retail banking. The combined operation will be the sixth largest by loans and deposits in Chile, DBRS reports. Market share will be close to Scotiabank’s target of 10% of mid-market, small business and micro lending, it adds.

Moody’s also boosted the rating outlook on Scotiabank’s existing Chilean subsidiary to positive from stable, based on an anticipated improvement in its banking franchise.

“The acquisition of Desarrollo will increase SSA’s deposit market share to 5% from 2% and make it the sixth largest bank in Chile, up from 12th,” it says in its report. “Moreover, the Desarrollo acquisition will improve SSA’s market presence by almost tripling its branch network and enhancing its earnings stability.”

Finally, DBRS notes Scotiabank’s international operations contributed 30% of its earnings in the fiscal year ended Oct. 31, 2006: “The relative importance of international operations is expected to continue increasing, given more positive growth prospects and non-organic growth opportunities in international operations relative to domestic banking.

“While DBRS believes the risk profile of the bank will increase in the medium term due to added economic, currency and operational risks, the added risk is partially mitigated by diversification by country and long-standing experience in lesser-developed markets,” it concludes.