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TORONTO (Reuters) - Two of Canada's largest banks pushed through the global financial crisis to report profits on Tuesday, but also disclosed higher provisions for bad loans that point to tougher quarters ahead.
Bank of Nova Scotia and Bank of Montreal closed out a first-quarter reporting season for the country's Big Six banks in which all met or exceeded expectations. But all of them also made room for, or took, hefty writedowns on their credit portfolios.
Scotiabank, Canada's third-largest lender, reported weaker earnings per share as provisions for bad loans more than doubled and its payout of preferred share dividends rose.
Bank of Montreal, the No. 5 lender, reported a 12 percent fall in net income, hurt by charges tied to volatile capital markets and an 86 percent jump in provisions for credit losses.
"Although the core results are doing fine, we have a continued deterioration of credit quality, which is going to be the focus of the market going forward. This is only going to get worse before it gets better," said John Aiken, an analyst at Dundee Capital Markets.
"(Earnings) more than likely are going to stay positive, but they're going to be lower than where we stand today because of credit losses."
Canadian banks, routinely ranked as the world's soundest, have remained profitable despite a crisis that has pushed many U.S. and European institutions to the brink of insolvency.
Experts credit conservative lending practices for helping Canadian banks avoid the massive writedowns and losses seen in other countries.
Canadian banking shares rallied last week after four of the Big Six -- Royal Bank of Canada, Canadian Imperial Bank of Commerce, National Bank of Canada and Toronto-Dominion Bank -- surprised investors with stronger-than-expected profits, but also warned that headwinds were building.
"We certainly got a window last week into what we ended up seeing today ... credit quality is deteriorating very clearly with all the banks," said Craig Fehr, a financial services analyst at Edward Jones.
Shares of both Scotiabank and Bank of Montreal opened stronger following their earnings reports. Scotiabank shares closed down 1 Canadian cent at C$27.02. Bank of Montreal closed up 65 Canadian cents at C$27.64.
Scotiabank reported net income of C$842 million ($653 million), or 80 Canadian cents a share, compared with C$835 million, or 82 Canadian cents share, a year earlier.
Fehr said the 80 Canadian cents was exactly in line with his forecast, while Aiken said profit was roughly in line with expectations when market-related charges were excluded. Analysts had expected 89 Canadian cents a share before one-time items, according to Reuters Estimates.
Earnings per share fell even as net income increased as preferred share dividends paid out rose to C$37 million from C$21 million a year earlier. Preferred share dividends are deducted after net income has been calculated.
Canadian banks have been hiking preferred share issuance to shore up their balance sheets as the global financial crisis causes a jump in bad loans.
Net income available to Scotiabank common shareholders fell to C$805 million from C$814 million a year earlier.
The bank also said its 2009 growth objectives remain possible. It targets growth in diluted earnings per share of between 7 and 12 percent and a return on equity of 16 to 20 percent.
"We will still pursue long-term opportunities even in this difficult environment. However, as we pursue these long-term opportunities we will do it with discipline and we will do it with prudence," Richard Waugh, Scotiabank's chief executive, said at the bank's annual meeting.
Bank of Montreal earned C$225 million, or 39 Canadian cents a share, in the first quarter, down from C$255 million, or 47 Canadian cents a share, a year earlier.
The bank reported adjusted cash earnings of C$1.09 a share after excluding charges of 69 cents a share, some of them linked to mark-to-market valuations of derivative contracts and asset-backed commercial paper.
Analysts were expecting a profit of 96 Canadian cents a share excluding items, according to Reuters Estimates.
Chief Executive Bill Downe told Reuters the bank is in no rush to expand its U.S. operations by buying banks there because better opportunities will likely emerge in time.
Shareholders of both banks voted at their annual general meetings to hold a nonbinding vote on how much their executives get paid. Royal Bank and CIBC investors voted for similar proposals last week.
Addition reporting by Frank Pingue and Scott Anderson in Toronto; Editing by Peter Galloway