(The following statement was released by the rating agency)
NEW YORK, March 30 (Fitch) Fitch Ratings has affirmed the ratings of Bank of
Nova Scotia's (BNS; 'AA-'/'F1+'; Stable Outlook) outstanding CAD-equivalent
16.38 billion registered mortgage covered bonds following our annual review of
the program at 'AAA'; Stable Outlook.
BNS has indicated that it will lower its contractual asset percentage (AP) to
93% for its registered mortgage covered bond program, which is in line with
Fitch's calculated breakeven AP for the 'AAA' rating. Fitch's breakeven AP
decreased to 93% from 93.5%, which is below the 93.5% AP used in the asset
coverage test currently reported in the monthly investor report. BNS indicated
that it will amend the contractual AP in its next monthly report. The amendment,
taken together with BNS' Long-term Issuer Default Rating (IDR) of 'AA-', the
unchanged IDR uplift of N/A, and the unchanged Discontinuity Cap (D-Cap) of 3
notches (moderate high risk), all support the covered bonds' 'AAA' rating.
KEY RATING DRIVERS
The rating is based on BNS' Long-term IDR of 'AA-', an unchanged D-Cap of 3
(moderate high risk) and the 93% AP that Fitch takes into account in its
analysis which equals Fitch's 'AAA' breakeven AP. The Stable Outlook is due to
the Stable Outlook on the Canadian sovereign rating and on BNS' IDR. Since
bail-in is not an explicit provision under the current Canadian framework, the
IDR remains a satisfactory indicator, in Fitch's view, of the likelihood that
the recourse against the cover pool would be enforced, and no IDR uplift is
applicable.
The 93% AAA' breakeven AP, corresponding to a breakeven overcollateralization
(OC) of 7.5%, is driven by the cover pool's credit loss of 9.3%, followed by the
asset disposal loss component of 0.6% due to maturity mismatches in a 'AAA'
scenario. The cash flow valuation component adds to 'AAA' breakeven OC by 0.6%
due to the short weighted average (WA) life of the mortgages, generally three to
five years, which results in a high value for the cover pool. The breakeven AP
considers whether timely payments are met in an 'AA' scenario and tests for
recoveries given default of at least 91% in a 'AAA' scenario.
The 9.3% 'AAA' credit loss represents the impact on the breakeven OC from the
20.9% WA default rate and the 59.3% WA average recovery rate for the mortgage
cover assets. This reflects an increase in the 'AAA' credit loss from Fitch's
prior analysis of 7.2% due to the cover pool's lower credit score distribution.
Fitch's 'AAA' credit loss considers an adjustment to borrower's credit scores to
account for use of Transunion's FICO8 score vs Equifax's BEACON score, on which
the agency's Canadian residential mortgage loan loss model is based.
Fitch takes into account the contractual AP maintained in the program, since
amounts in excess of the contractual commitment are secured back to BNS through
the demand loan and therefore not available to covered-bond holders in the event
of issuer default.
Canadian covered bond program documents include a feature called the Selected
Assets Required Amount (SARA) clause, which places some conditions on the sale
of assets in the event of an issuer default. Fitch has considered the impact of
this clause by modelling an issuer default in each of the first six quarters and
before the first benchmark covered bond maturity and determined that the
overcollateralization level is sufficient for all possible sale periods under a
given rating scenario.
RATING SENSITIVITIES
The 'AAA' rating would be vulnerable to downgrade if any of the following
occurs: (i) the IDR is downgraded by three or more notches to 'A-' or below; or
(ii) the number of notches represented by the D-Cap is reduced to 0; or (iii)
the AP that Fitch considers in its analysis increases above our 'AAA' breakeven
level of 93%.
The Fitch breakeven AP for the covered bond rating will be affected, by, among
other factors, the profile of the cover assets relative to outstanding covered
bonds, which can change over time, even in the absence of new issuance.
Therefore the breakeven AP needed to maintain the covered bond rating cannot be
assumed to remain stable over time.
More details on the cover pool and Fitch's analysis will be available in a
credit update report, which will be available shortly at www.fitchratings.com.
Contact:
Primary Analyst
Roger Lin
Director
+1 212-908-0778
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Susan Hosterman
Director
+1 212 908 0780
Committee Chairperson
Suzanne Mistretta
Senior Director
+1 212 908 0639
Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email:
hannah.james@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
Canadian Residential Mortgage Loan Loss Model Criteria (pub. 16 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864357
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May
2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Counterparty Criteria for Structured Finance and Covered Bonds: Derivative
Addendum (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175
Covered Bonds Rating Criteria (pub. 11 Mar 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878761
Criteria for Interest Rate Stresses in Structured Finance Transactions and
Covered Bonds (pub. 19 Dec 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr
_id=1001735
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001735
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det
ail=31
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