National Bank of Canada missed analysts' earnings estimates on Wednesday, hurt by higher costs and money set aside for bad loans amid a meltdown in the U.S. banking sector and souring economy.

Shares of the Montreal-based bank were down more than 1% in morning trading, tracking broader market declines.

The results come after Canada's top four banks reported lower-than-expected earnings as they had to set aside more money for bad loans and incurred higher expenses related to workforce and other tech investments.

National Bank, like its peers, has also set aside rainy-day funds, signaling fears that the economy is set for challenging times that could see more Canadians defaulting on their loans.

"Our defensive posture with strong capital and liquidity positions and prudent levels of allowances for credit losses will continue to support profitable growth and help us navigate the uncertainty that may lie ahead," bank CEO Laurent Ferreira said.

The bank was still one of the better performers, analysts said, owing to the strength of its domestic retail banking segment and driven by comparatively low credit-loss provisions.

Net income from its personal and commercial banking segment rose 14%, helped by an increase in net interest income driven by growth in loans and higher deposits.

"While National Bank could not avoid the same pressures on top-line growth and expense inflation, it navigated better than most of its peers," Barclays analyst John Aiken said, noting that the bank had beat his projections for second-quarter earnings.

The bank, in its report to shareholders, warned that the Canadian economy could be "lethargic" over the next year, but thinks that the country can still avoid an economic contraction in 2024 owing to its strong banking system.

Net income on an adjusted basis for the three months ended April 30 came in at C$847 million ($633.4 million), or C$2.38 a share, compared to C$889 million, or C$2.53, a year ago.

Provision for credit losses rose to C$85 million from C$3 million a year ago.

On a per share basis, National Bank earned C$2.38 per share, compared with analysts' estimate of C$2.40, according to Refinitiv data.

($1 = 1.3372 Canadian dollars)

(Reporting by Mehnaz Yasmin in Bengaluru and Nivedita Balu in Toronto; Editing by Pooja Desai, Jan Harvey and Mark Porter)