Fitch Affirms Bank of Nova Scotia's Insured Mortgage Covered Bond Program

Business Wire

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed Bank of Nova Scotia's (BNS, rated 'AA-'/'F1+' with a Stable Outlook) insured mortgage covered bonds at 'AAA' with a Stable Rating Outlook. This action follows Fitch's annual review of the program, which incorporates an analysis of the cover assets under the agency's new Canadian Residential Mortgage Loan Loss Model Criteria released May 15, 2013.

KEY RATING DRIVERS: BNS' INSURED MORTGAGE COVERED BONDS

Following the program's annual review, the 'AAA' rating of BNS' insured mortgage covered bonds is based on the issuer's Long-term Issuer Default Rating (IDR) of 'AA-', Fitch's Discontinuity Cap (D-Cap) of 3 (moderate high risk) and the program's contractual asset percentage (AP) of 95%, which is equal to the 'AAA' breakeven AP supporting Fitch's rating. It is sufficient to support the rating on an 'AA' PD basis plus two notches uplift for outstanding recoveries.

As of June 2013, CAD-equivalent 15.79 billion bonds were outstanding under the program. They are secured by a cover pool consisting of CAD 16.6 billion Canada Mortgage and Housing Corporation (CMHC)-insured residential mortgages. The 'AAA' breakeven AP is driven by a weighted average (WA) PD of 22% and a WA recovery rate (RR) of 96.5% on the cover pool in a AAA scenario, which takes into account the benefit of the CMHC insurance, on the mortgage loans. In addition, the WA PD reflects an adjustment for borrower credit scores reported from Transunion. Fitch's Canadian mortgage loss model was regressed from Equifax, an adjustment was made to align the score between the two providers.

The D-Cap is driven by Fitch's assessment of both the systemic and cover-pool specific alternative management for the program. From the prior annual review, Fitch has revised the cover-pool specific alternative management assessment to moderate high risk from moderate to address the data quality for the most recent surveillance review.

RATING SENSITIVITIES: BNS' INSURED MORTGAGE COVERED BONDS

BNS' insured mortgage covered bonds rating would be vulnerable to a downgrade if any of the following occurred: (i) the IDR was downgraded by three notches to 'A-' , (ii) the D-Cap fell to 0 (full discontinuity), or (iii) the AP that Fitch takes into account in its analysis exceeded 95%.

For BNS' insured mortgage covered bonds, if CMHC lost the full backing of the Government of Canada, or if the Government of Canada's rating suffered a downgrade, Fitch would revise the credit given to the insurance provided by CMHC on the mortgage loans in the respective cover pools. This could lead to weaker liquidity as well as higher credit risk expectations for the cover pool. As a result, the D-Cap would likely decrease and the breakeven AP for the current covered bonds' ratings would likely decrease.

Fitch's breakeven AP for a given covered bonds' ratings will be affected, among others, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuances. Therefore it cannot be assumed to remain stable over time.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Covered Bonds Rating Criteria' (Sept. 10, 2012);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 13, 2013);

--'Covered Bond Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum' (June 3, 2013);

--'Canadian Residential Mortgage Loan Loss Model Criteria' (May 15, 2013);

--'Global Criteria for Lenders' Mortgage Insurance in RMBS' (Sept. 7, 2012).

Applicable Criteria and Related Research:

Covered Bonds Rating Criteria - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688092

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707155

Covered Bonds Rating Criteria - Mortgage Liquidity and Refinance Stress Addendum

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709665

Feedback Analysis: Canadian Residential Mortgage Loan Loss Model Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708243

Global Criteria for Lenders' Mortgage Insurance in RMBS

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709255

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=799917

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Contact:
Fitch Ratings
Primary Analyst
Vanessa Purwin, +1 212-908-0269
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Roger Lin, +1 212-908-0778
Associate Director
or
Committee Chairperson
Rui Pereira, +1 212-908-0776
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com
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