* EPS below forecast when gain from sale stripped out
* Credit loss provision rises 40 percent to C$752 million
* Provision is higher than analysts had anticipated
* To cut 4-5 percent of branches in next two years (Adds comments from executives on conference call)
By Matt Scuffham
TORONTO, May 31 (Reuters) - Bank of Nova Scotia on Tuesday reported second-quarter results which were below market expectations and increased funds set aside to cover bad loans by 40 percent as lending to energy companies turned sour.
Scotiabank, which has the biggest direct exposure of the major Canadian banks to the oil and gas industry, followed rivals Royal Bank of Canada and Toronto-Dominion Bank in reporting increased bad loan provisions.
Net income for the second quarter which ended on April 30, excluding a restructuring charge, was C$1.9 billion ($1.4 billion), or C$1.46 per share, compared with C$1.8 billion, or C$1.42 per share, a year earlier.
Barclays' analyst John Aiken said the headline number included a C$100 million disposal gain, and without that, earnings were C$1.40 per share, below the average forecast for C$1.42, according to Thomson Reuters I/B/E/S.
"Given that its peers all beat expectations, coupled with additional deterioration in international credit and a still low energy coverage ratio, we would expect relative pressure on Scotia's valuation," he said.
Scotiabank said its provision for credit losses increased to C$752 million compared with C$539 million in the last quarter, driven primarily by exposure to the energy sector.
Aiken said the credit loss provision was well above consensus expectations of roughly C$620 million.
Oil prices touched 13-year lows in February, putting increased pressure on Canadian banks' energy clients and leading to rising loan defaults.
Energy companies across Canada and the United States have met with their banks in recent weeks to determine how much debt they can continue to hold as part of a bi-annual process that is still underway.
Scotiabank's Chief Risk Officer Stephen Hart said the bank had completed more than 70 percent of the redeterminations, resulting in an average 20-percent cut in credit lines for three-quarters of clients reviewed so far.
The bank took a restructuring charge of C$278 million after tax relating to cost cutting measures, which Porter said would contribute to the digital transformation of the bank.
The restructuring, which the bank expects will result in annual cost savings of over C$750 million by 2019, includes a 4 percent to 5 percent reduction in branch numbers from just over 1,000 at present, Canadian banking head James O'Sullivan said.
Last week, Bank of Montreal said it would shed 4 percent of its 46,000 workforce in a drive to cut costs.
$1 = 1.3071 Canadian dollars Editing by David Evans and Nick Zieminski