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Bank of Nova Scotia BNS-T reported lower fourth-quarter profit as expenses increased and the bank set aside more money to cover loans that could default, but still beat low expectations on the strength of robust retail banking revenues.

Canada’s third-largest bank is the first major lender to report earnings for the fiscal fourth quarter, giving a glimpse of some of the pressures that are likely to weigh on results across the sector.

Provisions for credit losses spiked from ultralow levels last year, though Scotiabank showed only modest signs of increasing stress in its credit books. Expenses ran high, up 6 per cent year over year, as high inflation and tight labour markets drove up costs. And results from capital markets and wealth management were soft amid tough market conditions.

Scotiabank continued to face pressure on its profit margins from loans, with its net interest margin down four basis points from the previous quarter – an area where some of Scotiabank’s peers are expected to perform better. (There are 100 basis points in a percentage point.)

The bank is in the midst of a transition in leadership, as Scott Thomson prepares to be its next chief executive. He joins the bank as president on Dec. 1 and will assume the top job on Jan. 31, when current CEO Brian Porter retires. Over a nine-year tenure, Mr. Porter reshaped the bank’s international footprint and built its presence in wealth management, but the bank’s share price lagged its rivals’.

“I have every confidence that Scott Thomson and the entire leadership team will continue to build on the strong foundation we have established,” Mr. Porter told analysts as he signed off from his final earnings call as CEO.

In a note to clients, banking analyst Darko Mihelic from RBC Dominion Securities Inc. added: “We continue to think this bank may be on the precipice of even more significant changes to come.”

In the fiscal fourth quarter that ended Oct. 31, Scotiabank earned $2.1-billion or $1.63 a share, compared with $2.6-billion or $1.97 in the same quarter last year.

Earnings were reduced by several charges recorded in the quarter, including a $340-million loss from the sale of investments in Venezuela and Thailand and from winding down operations in India and Malaysia. The bank also took a $66-million restructuring charge in its Asian investment banking and technology groups, and recorded $98-million in costs to expand its Scene+ loyalty program.

On an adjusted basis, the bank said it earned $2.06 a share, which was ahead of the $1.99 anticipated by analysts, according to Refinitiv.

Scotiabank earmarked $529-million in provisions for credit losses – the money banks set aside to cover loans that may go bad. That was a large increase from a year ago, at $168-million, when Scotiabank was recovering provisions it had set aside during the early months of the COVID-19 pandemic. But chief risk officer Phil Thomas noted that provisions as a percentage of total loans are still low by historical standards, and returning to normal levels gradually.

“This bank has done a tremendous amount of work to de-risk our portfolios,” Mr. Thomas told analysts.

Scotiabank also provided a barometer for the stress facing borrowers with variable-rate mortgages, as surging interest rates push borrowing costs higher. Scotiabank is one of few banks at which a borrower’s payments reprice regularly as interest rates move. But Canadian banking head Dan Rees said Tuesday that “we are not seeing credit pressure in that category in [the fourth quarter]. Full stop.”

“From a consumer behaviour standpoint, the variable customer is in good shape,” he said.

In the bank’s core Canadian banking division, profit of $1.17-billion was down 5 per cent from a year ago, in large part because of higher provisions for loan losses. Revenue was up 11 per cent year over year, as income from interest and fees both improved.

Profit from international banking was up 22 per cent to $679-million, as loan margins increased and revenue rose 8 per cent.

In the global banking and markets division, profit of $484-million was down 4 per cent from a year earlier, as higher salary costs and provisions weighed on earnings. And wealth management profit of $363-million fell 6 per cent as income from fees declined.

Scotiabank kept its quarterly dividend unchanged at $1.03 a share.