TEXT-S&P revises Bank of Nova Scotia outlook to negative

Overview
-- We have observed trends of rising consumer leverage and elevated
residential real estate prices in Canada, in conjunction with incremental
deterioration of the domestic and global economic outlook.
-- In our view, this poses a risk for Canadian banks given the importance
of each bank's consumer credit loan portfolio.
-- We are revising our outlook to negative from stable and affirming our
'AA-' long-term and 'A-1+' short-term issuer credit ratings on The Bank of
Nova Scotia.
-- The negative outlook reflects that we might lower the ratings on the
bank if the growing economic imbalances were to lead us to a more negative
view of the economic and industry environment in which Canadian banks operate.

Rating Action
On July 27, 2012, Standard & Poor's Ratings Services revised its outlook on
Canadian financial institution The Bank of Nova Scotia (BNS) to negative from
stable. At the same time, Standard & Poor's affirmed its 'AA-' long-term and
'A-1+' short-term issuer credit ratings.

Rationale
The outlook revision is linked to our evolving views of economic risk and
industry risk for banks operating in Canada. A prolonged run-up in housing
prices and consumer indebtedness in Canada is contributing to growing
imbalances and Canada's vulnerability to the generally weak global economy,
applying negative pressure on economic risk for banks. Growing pressure on
banks' risk appetites and profitability arising from competition for loan and
deposit market share could also lead to a deterioration in our view of
industry risk. If current trends continue, we might lower the ratings on BNS
by one notch, if the growing economic imbalances were to lead us to a more
negative view of the economic environment in which Canadian banks operate, in
the absence of offsetting bank-specific considerations (see "Outlooks On Seven
Canadian Banks Revised To Negative From Stable Due To Economic And Industry
Risk Trends; All Ratings Affirmed," published July 27, 2012, on RatingsDirect
on the Global Credit Portal).

In our view, BNS has a strong business position, adequate capital and
earnings, a strong risk position, average funding, and adequate liquidity,
reflecting its unchanged stand-alone credit profile (SACP) of 'a+'. The anchor
rating is 'a-'.

According to our criteria, BNS is a "systemically important" bank. We consider
that the bank would likely benefit from extraordinary government support in
times of stress. As such BNS benefits from a one-notch uplift from its
stand-alone credit profile to reflect government support.

Outlook
The negative outlook reflects the potential that we might lower the ratings on
BNS if the growing economic imbalances were to lead us to a more negative view
of the economic and industry environment in which Canadian banks operate, in
the absence of offsetting considerations specific to BNS. The outlook also
reflects our expectation that BNS will continue to generate consistent
earnings through its premier business franchises in Canada and diversified
revenue sources, even though our expectations are for moderating operating
revenue growth due to a slowing Canadian economy. We could lower the ratings
if the risk-adjusted capital (RAC) ratio falls below 7% for several
consecutive quarters, losses from trading operations exceed historical losses,
or net charge-offs consistently become substantially higher than the domestic
peer average. We could raise the ratings if the RAC ratio is consistently
above 10%.

Ratings Score Snapshot
Issuer Credit Rating AA-/Negative/A-1+

SACP a+
Anchor a-
Business Position Strong (+1)
Capital and Earnings Adequate (0)
Risk Position Strong (+1)
Funding and Liquidity Average and Adequate (0)

Support 1
GRE Support 0
Group Support 0
Sovereign Support 1

Additional Factors 0