The Bank of Nova Scotia’s recent purchase of a credit card portfolio from JPMorgan Chase is credit negative for the bank, says New York-based credit rating agency Moody’s Investor Service.
Although the transaction is not financially material to Scotiabank, Moody’s says, it is negative from a credit perspective because it involves taking on more risk. The transaction “is part of a series of growth initiatives focused on increasing the bank’s exposure to non-mortgage consumer loans,” the credit rating agency says, “which are particularly prone to rapid deterioration during an economic shock and exhibit higher defaults and loss severities than mortgage portfolios.”
In addition, Moody’s also sees the deal as being indicative of Scotia’s “increased risk tolerance and strategic imperative to increase net interest margins by shifting the asset mix toward higher yielding, unsecured categories of consumer credit at a time of record Canadian consumer leverage.”
Scotia’s common equity Tier 1 ratio will fall by less than 10 basis points as a result of the deal, Moody’s calculates, and the acquisition will be accretive to Scotia’s earnings in year one, the credit rating agency says.