Nov 28 (Reuters) – Bank of Nova Scotia (BNS.TO) on Tuesday forecast its earnings will rise “marginally” in 2024, after the Canadian lender missed fourth-quarter profit estimates as uncertain economic climate prompted it to set aside more funds to guard against bad loans.

Scotiabank kicks off Canadian banks’ earning season, wrapping up a financial year marked with economic uncertainty, rising credit loss provisions as more consumers struggle to pay off their mortgages, layoffs to cut costs, and rising expenses.

The bank’s shares fell nearly 5% in early trading, dragging down Canada’s main stock index (.GSPTSE).

Lenders have been bracing for a surge in loan defaults as effects of the central bank’s monetary policy tightening flow through and the economy flirts with a recession.

The lender said earnings in the 2024 fiscal year to Oct. 31 would be impacted by “slowing economic growth across its markets and increasing regulatory capital requirements” but it would also benefit from interest-earning assets.

“We expect a challenging environment will persist for consumers and businesses,” Chief Risk Officer Phil Thomas told analysts, citing muted Canadian economic growth, continued inflationary pressures and uncertain prospects for rate cuts.

Finance chief Raj Viswanathan said deposit and loan growth were also expected to moderate from 2023 levels, noting savings levels have started coming down in Canada with inflation at multi-year highs, leaving consumers with less cash in hand.

For the fourth quarter, Scotiabank increased its provision for credit losses to C$1.26 billion ($927.90 million) from C$529 million a year earlier, as a result of unfavourable economic outlook and “continued uncertainty around the impact of higher interest rates.”

Income from its Canadian unit, its biggest, fell 30.8%, while expenses rose 10% on an adjusted basis, driven by higher salaries and other costs.

The bank said adjusted net income fell 36% to C$1.67 billion or C$1.26 per share, well below analysts’ forecast of C$1.65 per share, according to LSEG data.

“A very challenging quarter for Scotiabank at first look driven by a notable jump in loan losses in Canadian retail lending, weaker revenue, and higher expenses, each of which we believe will be concerning for investors,” KBW analyst Mike Rizvanovic said.

While the bank outlined some of its priorities for 2024, including shoring up its consumer banking business, operational efficiency and technology, Chief Executive Scott Thomson, who took charge earlier this year, will present his overall growth strategy for the lender at its investor day on Dec. 13.

The bank said last month it would cut about 2,700 jobs globally, or about 3% of its workforce. Its efforts to streamline operations resulted in a restructuring charge of C$258 million, Scotiabank said.

Net interest income inched up, as aggressive rate hikes by the Bank of Canada allowed the lender to charge higher interest on loans.

The metric – which measures the difference between what banks earn on loans and pay out on deposits – rose 1% to C$4.67 billion.

($1 = 1.3579 Canadian dollars)

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