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TORONTO (Reuters) - Bank of Nova Scotia (BNS.TO) and Bank of Montreal (BMO.TO) posted stronger-than-expected quarterly profits on Tuesday and raised their dividends, even as signs emerged that core consumer lending was slowing after years of robust growth.
Shares of BMO, Canada's fourth-largest bank, rose on the surprise news of the more generous payout. Raising the dividend for the first time in five years, the bank was the last in the sector to resume such increases.
Prior to the onset of the financial crisis in 2007, Canadian banks raised their dividends usually twice a year.
At the same time, BMO lowered its payout ratio to a range of 40-to-50 percent from 45-to-55 percent, meaning it will commit less of its profit to future payouts.
"The dividend raise was moderate and the targeted payout range reduction should temper expectations going forward," said Todd Johnson, a portfolio manager at BCV Asset Management in Winnipeg.
He said the conservative dividend policy, combined with BMO's acquisition of Wisconsin-based lender Marshall & Illsley last year, suggested the bank is tilting its focus more to growth than income.
The two banks are the first to report in a fiscal third-quarter earnings period that could provide more evidence of a slowing Canadian economy after years of relatively steady growth.
Canadian banks escaped the U.S. financial crisis in relatively strong shape, and since then have been consistently ranked as the world's strongest lenders.
With signs that Canada's decade-long housing boom is peaking and Canadians in general are becoming more cautious in their borrowing, the banks' core consumer lending businesses are starting to face slowing growth.
On a net basis, profit at both banks jumped in the quarter, as BMO benefited the C$4.1 billion M&I takeover, while Scotiabank recorded a large gain from the C$1.27 billion sale of its corporate headquarters earlier this year.
But lending margins narrowed at the Canadian banking operations of both lenders, as low interest rates reduced the profits the banks make on each loan.
Loan growth, meanwhile, was steady, but nowhere near the growth rates of recent years.
"What we're seeing is that both of them experienced margin compressions. The revenues were increasing, but we're starting to see that pace of increase slowing," said John Aiken, an analysts at Barclays Capital.
Shares of BMO surged early in the session, but ended up only 0.4 percent at C$57.93, while Scotiabank eased 0.08 percent to C$52.90.
BMO's adjusted profit for its third quarter ended July 31 came in at C$1.49 a share, well ahead of analyst's estimates of a C$1.39 a share, according to Thomson Reuters I/B/E/S
Net profit climbed to C$970 million (US$980 million), or C$1.42 a share, from a year-earlier C$708 million, or C$1.09, helped by a C$117 million contribution from M&I.
BMO's flagship Canadian personal and commercial bank produced C$453 million in profit, a slim 2.4 percent gain year-over-year, as low interest rates and falling credit card balances squeezed lending margins.
Consumer loan growth grew 6.6 percent year-over-year, which the bank was helped by its popular five-year fixed 25-year amortization mortgage, which BMO has offered at a record low 2.99 percent rate at times this year.
"Our market share went up 21 basis points in Q3, so we did more business than more of our competitors," said Frank Techar, head of BMO's Canadian personal and commercial bank.
"Our expectation is we'll see a little softening in Q4."
Income from BMO's private client wealth management business rose 5.7 percent to C$109 million, while at its wholesale banking arm, BMO Capital Markets, profit fell 14 percent to C$232 million from the year before.
Net profit at Scotiabank, Canada's No. 3 lender, rose to C$2.1 billion, or C$1.69 a share, from C$1.3 billion, or C$1.10, a year earlier.
Stripping out a C$614 gain from the office sale and other items, the profit was C$1.22 a share, just ahead of the analysts' average estimate of C$1.19.
Scotiabank agreed to sell the 68-story Scotia Plaza office complex in Toronto to a pair of real estate investment trusts earlier this year.
The bank raised its quarterly dividend by 2 Canadian cents to 57 Canadian cents a share, which was largely expected.
Canadian banking profit rose 22 percent to C$521 million, helped by asset and deposit growth, as well as by lower loan-loss provisions and a gain on the sale of a leasing business.
International banking income climbed 29 percent to C$442 million, helped by Scotiabank's acquisition of a majority stake in Colombia's Bank of Colpatria, which closed in January. Compared with the second quarter, however, income fell 1 percent.
"There was weakness in the international banking," said Peter Routledge, an analyst at National Bank Financial.
Scotiabank paid about $1 billion for a 51 percent stake in Colpatria, one of a series of acquisitions it has made since the 2008 financial crisis.
Scotiabank bills itself as Canada's most international bank with offices in 50 countries, largely in Latin America.
Editing by Frank McGurty