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(Adds CFO comments, updates shares)
By John Tilak
TORONTO, Aug 28 (Reuters) - Bank of Nova Scotia, which reported a quarterly profit that beat market expectations on Friday, said bad loans in the energy sector climbed as the oil price selloff took a toll.
Shares of Scotiabank, Canada's third-largest bank, were down nearly 1 percent in mid-afternoon trading.
Gross impaired loans to the oil and gas sector more than doubled in the third quarter to C$96 million from the same period last year. They were C$92 million in the second quarter.
The lender's oil and gas portfolio forms almost 10 percent of business and commercial loans, more than any of the other major Canadian banks.
All of the five biggest Canadian lenders have reported increases in energy-sector bad loans in the third quarter, marking a clear trend that confirms investor worries about the impact the oil price weakness was having on the lenders.
"It seems to me that it's going to be a tough year ahead for Bank of Nova Scotia. They have an outsized exposure to the oil and gas industry," Edward Jones analyst James Shanahan said.
Like its peers, Scotiabank has been conducting stress tests under various scenarios to gauge the impact of plunging oil prices on its loan book.
"It's well diversified, it's not significant to our overall portfolio and we think it's very manageable," Chief Financial Officer Sean McGuckin said of the lender's energy exposure.
The bank is encouraging energy companies to curtail investments in exploration, cut dividends, raise equity or debt, and sell assets in order to strengthen their balance sheets, he said in an interview.
Net income in the quarter ended July 31 was C$1.85 billion, or C$1.45 per share, compared with C$2.35 billion, or C$1.85 per share, a year ago. Core earnings were C$1.47 per share.
Analysts on average had expected earnings of C$1.45 per share, according to Thomson Reuters I/B/E/S.
Earnings for the international banking business climbed 11 percent, helped by loan growth across Latin America and higher fee income.
The Canadian unit's profit fell due in part to a gain recorded in the year-earlier period. Excluding special items, the segment grew 15 percent.
But the lender's global banking and markets division recorded a 20 percent drop in profit, reflecting weakness in investment banking and higher provisions for credit losses.
Scotiabank also increased its quarterly dividend. (Reporting by John Tilak; Editing by Chizu Nomiyama and James Dalgleish)