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Pedestrians pass a National Bank branch in Toronto.Melissa Tait/The Globe and Mail

National Bank of Canada NA-T reported a slight year-over-year rise in third-quarter profit that fell below analysts’ estimates, as expenses spiked, capital markets earnings slumped and the lender set aside more money for potentially bad loans.

Canada’s other large lenders have reeled under the weight of similar pressures in the third quarter, largely outpacing slim increases in revenue. National Bank earned more money in most of its segments than it did in the same quarter last year, but the deep dive in capital markets earnings dragged on results.

In a note to clients, Barclays analyst John Aiken called National Bank’s results “a pretty large miss.”

“While underlying growth was decent … the headline number is likely to be something that the market will find difficult to ignore,” he said.

After the bank released its results on Wednesday, the price of its shares fell about 3.9 per cent, compared to an S&P/TSX Composite Banks Index gain of 0.1 per cent. It was the worst earnings-day performance among the five major banks that have reported results so far this earnings season.

Even as many of its rivals benefitted from stronger results in capital markets, National Bank’s profit in that division tumbled 27 per cent, to $205-million, on lower trading activity and “exceptionally low market volatility,” the bank said. The drop stretched across the division’s businesses, including equities, foreign exchange and fixed income and commodities.

National Bank, BMO, Scotiabank: A breakdown of the big banks’ third-quarter earnings so far

Étienne Dubuc, National Bank’s executive vice-president of financial markets, told a conference call the lender expects this trend to reverse in the quarters ahead.

“In the last month, we’ve seen a normalization of market volatility and a pickup in client activity, so no, I don’t think our global markets performance in the third quarter is the new normal,” he said.

Expenses across the bank climbed 9 per cent to $1.42-billion from the same period last year, which the bank said was driven by compensation and technology costs, offsetting a 4-per-cent bump in revenue.

Costs have spiked at many of Canada’s largest banks, especially in salaries. Some lenders have opted to reduce their work forces as they have attempted to trim spending. National Bank chief financial officer Marie Chantal Gingras told the conference call that the lender’s Canadian employee base has declined since the first quarter. But she said the bank is not planning for layoffs, because it expects expense growth to ease.

“With the environment expected to remain challenging in the near term, we continue to be strategic in prioritizing and managing expenses,” Ms. Gingras said.

National Bank is the fifth Canadian bank to have reported earnings for the fiscal third quarter. It joins Toronto-Dominion Bank TD-T and Bank of Montreal BMO-T in missing analyst estimates. Bank of Nova Scotia BNS-T met expectations, while Royal Bank of Canada’s RY-T earnings surpassed estimates. Canadian Imperial Bank of Commerce CM-T reports results on Thursday.

National Bank posted net income that rose 2 per cent year-over-year to $839-million in the three months ended July 31. Adjusted to exclude certain items, the bank said it earned $2.21 per share, missing the $2.36 per share analysts expected, according to Refinitiv data.

The lender joined its peers in increasing provisions for credit losses – the funds lenders set aside to cover loans that may default – as banks bolster their reserves from lows in 2021, during the height of the pandemic.

In the quarter, National Bank set aside $111-million in these provisions. That was nearly double the amount in the year before, and higher than analysts anticipated. It included $38-million against “performing” loans – those that are still being repaid – based on models that use economic forecasting to predict future losses.

In the same quarter last year, National Bank reserved $57-million in provisions.

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