(Recasts, adds analyst's comment and details)
By Nicole Mordant
VANCOUVER, British Columbia, Dec 6 (Reuters) - Bank of Nova Scotia (BNS.TO) posted a 5 percent increase in fourth-quarter earnings on Thursday but its shares slipped as the bank provided a cautious outlook for next year.
Rick Waugh, Scotiabank's president and chief executive, said he expected a "challenging" environment through much of 2008 but that Canada's third-biggest bank should to able to achieve its targets.
"Their outlook is a little bit discouraging," said John Kinsey, a portfolio manager at Caldwell Securities.
"They are certainly not being aggressive in their forecasts," he said, pointing to Scotiabank's target of 7 percent to 12 percent earnings growth, the same as the past year.
Scotiabank reported profit of C$938 million ($929 million), or 95 Canadian cents a diluted share, for the three months to Oct. 31.
That was up from C$890 million, or 89 Canadian cents a share, in the same period a year earlier despite a C$53-million hit from translating foreign earnings into Canadian dollars.
The increase was a result of the impact of several acquisitions, organic growth in its domestic and international banking units, and higher securities gains.
Analysts expected Scotiabank to earn C$1.01 a share before exceptional items, according to Reuters Estimates.
The bank's stock dropped on Thursday, down 86 Canadian cents, or 1.6 percent, at C$51.30 in afternoon trading on the Toronto Stock Exchange.
Scotiabank, as expected, raised its dividend by 2 Canadian cents to 47 Canadian cents a share.
At a time when banks in Canada and around the world are taking hits from investments linked to the crisis-plagued U.S. subprime housing market, Scotiabank said it has no direct exposure to U.S. subprime mortgages.
The bank said it had only "nominal holdings" of nonbank asset-backed commercial paper, a market in Canada that froze up in August on concerns it was invested in subprime mortgages.
Scotiabank said it doesn't sponsor or manage any structured investment vehicles and has only nominal investments in them.
The fourth-quarter earnings included a pretax gain of C$202 million on Scotiabank's stake in Visa Inc. and pretax losses of C$191 million on structured credit instruments, including nonbank asset-backed commercial paper.
Scotiabank said net income at its domestic banking unit rose 29 percent to C$434 million due to the gain on its Visa stake. Without that boost, net income in the unit was up only 2 percent year-on-year, held down by higher expenses.
Profit at Scotiabank's international operations, which include businesses in the Caribbean, South America and Mexico, increased 32 percent to C$353 million.
Without the help of the Visa gain, net income at the international division was up 5 percent year-over-year on the back of organic growth in the Caribbean and Central America.
Profit at Scotia Capital, the group's investment banking and capital markets unit, dipped C$9 million to C$226 million from the year-before quarter due to lower revenues from derivatives transactions and higher expenses. ($1=$1.01 Canadian) (Editing by Peter Galloway)