The rating is based on BNS's Long-term Issuer Default Rating (IDR) of 'AA-', the Discontinuity Cap (D-Cap) of 3 (moderate-high risk) and the program's contractual asset percentage (AP) of 95%.

In terms of sensitivity of the covered bonds' rating, the 'AAA' rating would be expected to be maintained, - all else being equal - even if one of the following occurred: (i) the IDR was downgraded by up to two notches to 'A'; or (ii) the D-Cap fell by two categories to 1 (very high risk); or (iii) the AP level Fitch takes into account in its analysis increased up to 95.3%, which is the breakeven level in line with the 'AAA' rating.

The program's contractual AP of 95% also supports a 'AAA' covered bonds' rating on a PD basis, which is possible as the D-Cap allows an uplift of 3 notches above BNS' 'AA-' IDR. As Fitch considers the program to be in wind-down, since new covered bond legislation prohibits issuance out of programs with insured mortgage assets, the agency takes only the contractually committed AP into account in its analysis.

The D-Cap of 3 (moderate-high risk) is driven by the weakest risk assessment of the five D-Cap components, which is for the systemic alternative management component in line with all other Canadian programs. All of the other D-Cap components are assessed as moderate risk from a discontinuity point of view. For more details, reference 'Fitch Places BACBI's Covered Bonds on Negative Watch; Assigns US and Canadian D-Caps & Outlooks' published on Sept. 12, 2012.

As of May 25, 2012, the cover pool consisted of 135,998 first-lien, Canada Mortgage and Housing Corporation (CMHC)-insured residential mortgage loans totaling CAD20.2 billion with a weighted-average (WA) original LTV of 77.6% (as calculated by Fitch Ratings). In an 'AAA' scenario, Fitch has calculated a cumulative weighted-average frequency of foreclosure (WAFF) of 12.4% and a weighted-average recovery rate (WARR) of 96.5%, which reflects the benefit of the CMHC insurance on the loans.

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 cover pool. This could lead to weaker liquidity assumed for the mortgage assets as well as higher credit risk expectations for the cover assets. As a result, the D-Cap would likely decrease and the AP supporting the current covered bonds rating would likely decrease.

The weighted average life (WAL) of the assets in the cover pool is approximately 2.5 years, compared to the WAL of 2.9 years for the covered bonds. Interest rate and currency risks on the covered bonds are hedged via swaps with BNS as counterparty with collateral posting and replacement provisions in line with Fitch criteria.

The rating action also incorporates a revision of refinancing spread assumptions, which are used to estimate the stressed sale price for the cover pool that an alternative manager would liquidate in the aftermath of an issuer default. The net present value (NPV) of cover pools is determined by discounting the value of the assets at a rate reflective of the revised refinancing spreads. The NPV of the assets is consistent with previous assumptions given the credit loss protection on the assets provided by the CMHC insurance which insulates a potential buyer from borrower default in the event of increasing stress in the housing market.

The outstanding covered bonds total CAD15.79 billion and are guaranteed by Scotia Covered Bond Trust, a special purpose company established for the program with restricted permitted activities.

The Fitch AP in line with the covered bond rating will be affected by, among others, 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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

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

--'Covered Bonds Counterparty Criteria' (July 25, 2012);

--'ResiLogic Mortgage Loss Criteria' (August 10, 2012);

--'Global Criteria for Lenders' Mortgage Insurance in RMBS' (Aug. 3, 2012).

Applicable Criteria and Related Research:

Global Criteria for Lenders' Mortgage Insurance in RMBS

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684475

ResiLogic Mortgage Loss Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686011

Covered Bonds Counterparty Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681797

Covered Bonds Rating Criteria

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

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