By Robb M. Stewart

Bank of Nova Scotia will be cautious on capital allocation as the change in administration in the U.S. introduces uncertainty for the global economy even as central bankers are easing monetary policy in response to cooling inflation.

The big Canadian lender expects solid earnings growth next year as it benefits from lower funding costs and growth in loans and deposits. Still, Chief Executive Scott Thomson said Donald Trump's return to the White House raises questions about global growth and inflation, which could be affected by the president-elect's stance on trade and immigration.

Scotiabank will be cautious on capital allocation into the country, though it continues to believe in the long-term potential of the core North American corridor where the bank is focusing its operations, Thomson told analysts on a call to discuss fiscal fourth-quarter results. He said he expects the U.S., Canada and Mexico will manage to navigate a period of uncertainty.

Helped by loan growth and a fall in provisions for soured loans, the bank's net income in the latest quarter rose to 1.69 billion Canadian dollars ($1.2 billion), or C$1.22 a share, from C$1.35 billion, or C$0.99, a year earlier. Still, stripping out certain items, adjusted per-share earnings came in at C$1.57, missing analysts' median estimate for C$1.60.

Overall revenue was up 3.1% at C$8.53 billion for the three months to Oct. 31 from C$8.27 billion, where analysts had expected C$8.63 billion.

Provisions for credit losses slipped to C$1.03 billion from C$1.05 billion the previous quarter and C$1.26 billion a year earlier. That was slightly below the C$1.07 billion that was expected.

However, net impaired loans increased to C$4.69 as of the end of October from C$4.45 billion last quarter. In Canada, impaired loans were up mainly due to higher loan formations in Scotiabank's commercial and retail portfolios. Impaired loans rose in international banking operations primarily due to higher retail and commercial formations.

The bank forecast strong net interest income growth and a higher net interest margin in the new fiscal year, while non-interest revenue is expected to grow more modestly with a higher tax rate and a reduction in inflation in certain international countries, as well as a higher provision for credit losses.

Falling interest rates in Canada, the U.S. and globally should support economic activity in the coming years, leading to a gradual strengthening of the global economy, the bank said.

President-elect Trump's proposed cuts to corporate tax rates are likely to support growth in the short run, easing the regulatory burden in some sectors of the U.S. economy, while the imposition of threatened broad-based tariffs would raise input costs for companies and put upward pressure on prices and downward pressure on economic activity, Scotiabank said. Aggressive trade policies could raise the risk of retaliation from impacted countries, raising global inflation while reducing growth, it added.

The bank said the U.S. outlook is subject to considerable policy uncertainty, and its economy could be stronger than expected early next year, but then weaken somewhat if uncertainty remains high and changes in trade and immigration policies are implemented. Progress on the inflation front should allow the Federal Reserve to continue cutting interest rates until mid-2025, it said.

In Canada, Scotiabank expects rate cuts by the Bank of Canada to lead to a rebound in economic activity, to about 2% growth next year from the roughly 1.2% expected in 2024. Interest-rate sensitive sectors of the economy, particularly consumption and the housing market, should underpin the modest recovery, it said.

Scotiabank kicked off earnings season for Canada's big banks.

Loan growth over the last year has been sluggish for Canada's banks, but is widely expected to pick up as falling rates spur demand and large numbers of Canadian homeowners prepare to renew mortgages that were last negotiated when rates were historically low. There are signs already that the housing market is returning to life, though economic growth in Canada remains soft, with annualized growth of 1% in the third quarter, and the job market continues to weaken.

The Bank of Canada has lowered its benchmark interest rate at each of its last four policy meetings and economists expect another cut later this month now that consumer price inflation has returned to the central bank's 2% target.

In Scotiabank's Canadian banking business, earnings were up, thanks in part to asset and deposit growth and a fall in loan-loss provisions. International banking earnings benefited from margin expansion and a favorable impact from foreign exchange movements, which helped offset higher provisions. In the bank's global banking and markets operations, lower net interest income with a decline in loan balances and increased expenses offset higher fee revenue and lower credit-loss provisions.

Scotiabank's common equity tier capital 1 ratio stood at 13.1% for the quarter, stronger than the at least 11.5% of risk-weighted assets required by Canada's banking regulator.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

December 03, 2024 09:22 ET (14:22 GMT)

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