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* Adjusted profit tops estimates
* Net profit eases due to bad loans at U.S. bank
* Bank increases dividend 2.8 pct
* Consumer lending margins narrow
* Shares rise 1.3 percent
By Cameron French
Feb 26 (Reuters) - Bank of Montreal's core profit topped expectations on the back of higher markets-related revenue and surprisingly steady consumer loan growth, prompting the bank to unexpectedly raise its dividend.
Shares of BMO, Canada's No. 4 lender and the first to release first-quarter results for 2013, jumped 1.3 percent on Tuesday on the result and dividend increase.
Adjusted profit for the quarter came in at C$1.52 a share, ahead of the year-before profit of C$1.42, and beating analysts' expectations of C$1.48 a share, according to Thomson Reuters I/B/E/S.
The steady loan growth - 9 percent at the bank's flagship Canadian retail bank - came despite concerns that a cooling housing market would cause lending growth to grind to a halt. However, the impact of the loan increases was all but negated by the impact of low interest rates.
"They had pretty good organic business growth in Canada and the U.S., but margin compression is really holding revenues back," said Peter Routledge, an analyst at National Bank Financial.
Net interest margins, or the gap between what the bank earns on loans and the cost of funding them, have been on the decline in recent quarters due to rock-bottom interest rates.
They narrowed to 1.85 percent from 2.05 percent in the quarter, as older loans that were issued at higher rates were renewed at current rates.
"We expect to see continuing moderate declines in (margins) over the next few quarters," Frank Techar, BMO's head of personal and commercial banking, said on a conference call.
The narrowing margins held profit gains at BMO's flagship Canadian retail bank to a meager 4 percent.
The thin margins suggest similar revenue pressure at Canada's other banks, which will report later this week and next, although the impact could be reduced for Royal Bank of Canada and National Bank of Canada, which like BMO, have relatively large capital markets exposure.
BMO's stock rose 82 Canadian cents to C$63.75 on the Toronto Stock Exchange.
On a net basis, profit eased to C$1.05 billion ($1.02 billion), or C$1.53 a share, from a profit of C$1.11 billion, or C$1.63, a year earlier, when the bank benefited from the unexpected paydown of bad loans acquired when it purchased U.S. lender Marshall & Ilsley in 2011.
This quarter, the result was hurt by a reduction in those recoveries.
Profit at BMO Capital Markets, the wholesale banking unit, rose 38 percent to C$310 million, while the bank's wealth management wing saw profit rise 56 percent to C$163 million.
BMO's U.S. Harris Bank network, which includes branches acquired through the 2011 takeover of Wisconsin lender Marshall & Ilsley, posted a 14 percent rise in profit to C$182 million.
The acquisition roughly doubled BMO's U.S. branch count to more than 600 and has given the bank a sizeable growth platform in a recovering area expected to show stronger growth than BMO's Canadian markets, which have been relatively steady in the wake of the financial crisis.
BMO's capital position has recovered since the transaction was closed, pushing its Basel III Tier 1 capital ratio to a strong 9.4 percent, ahead of the 7 percent threshold that banks were expected to meet this year.
However, BMO Chief Executive Bill Downe said it was unlikely the bank will use its financial flexibility for another large U.S. acquisition, citing a shrinking pool of struggling targets that would be eager to welcome a larger buyer.
"I'd say in the short run (the probability) is pretty low," he said on a conference call. "Sellers are feeling better about the future, and even if they would intend to do the transaction at some point down the road, I think the tendency would be to delay."
The bank raised its dividend 2 Canadian cents to 74 Canadian cents a share, marking just the second time it has increased its payout since the 2008 financial crisis.
"Given the importance of dividend yields to the banks' valuations, it will likely put some pressure on others who do not announce similar increases this quarter," Barclays Capital analyst John Aiken said in a research note.
RBC, National, Toronto-Dominion Bank, and Canadian Imperial Bank of Commerce will report results on Thursday, followed by Bank of Nova Scotia next week.