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Canada's Scotiabank warns of slowdown squeezing interest income gains

A Bank of Nova Scotia logo is seen outside of a branch in Ottawa

By Mehnaz Yasmin

(Reuters) -Bank of Nova Scotia reported a lower fourth-quarter profit on Tuesday and said it expects earnings next year to take a further hit as the economic downturn offsets gains from higher interest rates.

The bank's earnings in 2023 will be impacted by higher funding costs, expenses and tax rates even though it will benefit from higher interest income, Chief Financial Officer Rajagopal Viswanathan said on a post-earnings call.

Shares of Scotiabank have tumbled over 20% this year and dropped another 2% after the company said its adjusted net income fell to C$2.62 billion ($1.93 billion), or C$2.06 a share, in the three months ended Oct. 31 from C$2.72 billion, or C$2.10, a year earlier.

The Canadian lender booked provisions of C$529 million, up from C$168 million a year ago, as a worsening economic picture prompts lenders to set aside funds to cover potential loan losses.

"In the Pacific Alliance countries, growth is moderating from its recent pace that's seen over the past year," outgoing Chief Executive Officer Brian Porter said.

Scotiabank's international banking business posted a 12% jump in adjusted earnings for the fourth quarter, compared with an 82% jump a year earlier.

Net interest income rose nearly 10% during the three-month period ended Oct. 31 as Canada's central bank embarked on a relentless monetary policy tightening campaign and raised interest rates in the fastest pace in decades.

"Once rates stabilize, the bank is expected to benefit from asset repricing, resulting in net interest margin expansion," Viswanathan said.

Scotiabank kicked off the quarterly earnings season for Canada's biggest banks. National Bank of Canada and Royal Bank of Canada are scheduled to report on Wednesday, while TD Bank, Canadian Imperial Bank of Commerce and Bank of Montreal will post their results on Thursday.

($1 = 1.3606 Canadian dollars)

(Reporting by Mehnaz Yasmin in Bengaluru; Editing by Sherry Jacob-Phillips and Maju Samuel)