(Reuters) - Bank of Nova Scotia (BNS.TO), Canada's third-largest bank, said on Tuesday it had set aside more funds to cover bad loans in the oil and gas sector and warned of worse to come as the slump in crude prices hurts its energy clients.
Scotiabank, which has the biggest direct exposure of the major Canadian banks to the oil and gas industry, followed rivals Royal Bank of Canada (RY.TO), Bank of Montreal (BMO.TO) and Canadian Imperial Bank of Commerce (CM.TO) in reporting increased bad loan provisions in the first quarter.
Toronto-based Scotiabank said funds set aside for credit losses rose 16 percent to C$539 million ($399.94 million) in the quarter to Jan. 31, mainly due to higher provisions in the oil and gas sector.
"We expect there to be additional provisions for some of our loans in the energy sector," Chief Executive Brian Porter told analysts on a conference call to discuss the results.
Scotiabank Chief Risk Officer Stephen Hart said the bank during the quarter had downgraded around 10 percent of its energy portfolio, primarily in the exploration and production sector, adding nine names to its "watchlist" of risky loans.
"Approximately 5 percent of our energy portfolio is on the watchlist, up slightly from last quarter. The watchlist consists almost entirely of E&P and oil services, which are the areas primarily affected by the drop in oil prices," he said.
Oil prices touched 12-year lows in January, putting increased pressure on Canadian banks' energy clients and leading to rising loan defaults.
Scotiabank, Canada's most international bank, reported first-quarter net income of C$1.81 billion, a 5 percent increase from the same period in the previous year, helped by growth in its international banking business.
Diluted earnings per share rose 6 percent to C$1.43, compared to $1.35 the previous year. Analysts on average had expected earnings of C$1.42 a share, according to Thomson Reuters I/B/E/S.
Net income attributable to shareholders at the lender's international banking unit jumped 21 percent to C$505 million, boosted by a weak Canadian dollar and growth in Latin America.
Scotiabank has been increasingly focusing on Mexico, Colombia, Chile and Peru.
The bank raised its quarterly dividend by 2 Canadian cents to 72 Canadian cents per share.
Scotiabank shares were up 3.9 percent at $56.91 in mid-morning trading.
($1 = 1.3477 Canadian dollars)
Editing by Paul Simao