New York City-based Moody’s Investors Service has placed the credit ratings of Bank of Nova Scotia on review for possible downgrade, the credit rating agency announced on Tuesday.
The review follows Scotia taking “significantmeasures to increase its profitability that signal a fundamental shift away from the bank’s traditionally low risk appetite,” the Moody’s announcement says. In particular, the rating agency is concerned that efforts to enhance current profitability, increase the risk of future incremental creditlosses when the credit cycle turns.
Over the last two years, Scotia has accelerated the growth in its credit card and auto finance portfolios, the Moody’s announcement says, “both of which are particularly prone to rapid deterioration during an economic shock and exhibit higher defaults and loss severities than mortgage portfolios.”
In addition, the bank has made a series of acquisitions in higher-growth, but less stable, international markets, the Moody’s announcement says.
Moody’s review will focus on the likelihood that Scotia’s “increased risk tolerance and strategic imperative to increase profitability by shifting the asset mix towards higher yielding categories of consumer credit, both domestically and in international operations, will persist,” the announcement says.
It will also examine the foreign markets where Scotia operates, and the bank’s strategy and performance in these regions.