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TORONTO (Reuters) - Canada's third and fourth biggest banks reported lower than expected profits on Tuesday, with the U.S. housing market proving to be a key factor separating a double-digit drop from a modest one.
Bank of Nova Scotia posted a 2 percent decline in net income but the No. 3 bank still managed to rack up more than C$1 billion ($952 million) in earnings.
Bank of Montreal's profit tumbled 21 percent to C$521 million as it cited weak U.S. real estate markets for sharply higher loan-loss provisions.
While executives said they expected more pressures ahead, they also vowed to work to contain costs.
"These times are challenging and we can reasonably expect them to remain challenging for the near future," Bank of Montreal CEO Bill Downe told a conference call.
Investors had braced for lower earnings from the Canadian bank group, but it appears that results will lag even diminished expectations, said John Kinsey, portfolio manager at Caldwell Securities Ltd.
"BMO was quite a disappointment. It was quite a bit lower than the targets," Kinsey said.
Scotiabank stock closed down 2.5 percent at C$46.45, while Bank of Montreal fell 0.3 percent to C$43.94.
"The news here is that lowered expectations should be thought of as the norm," said Andrew Martyn, a portfolio manager at Davis-Rea.
Scotiabank operates primarily in Canada, Mexico and Latin America, and its absence from the United States has helped it outperform this year.
"Scotia did better than BMO and that's part and parcel of the fact that they have very limited U.S. operations," Martyn said.
Scotiabank shares are down nearly 8 percent so far in 2008, the best showing among Canada's six largest banks.
"There are challenging results out of the U.S. and I think the market rewards Scotia for not playing in that pool," said Craig Fehr, a bank analyst at Edward Jones.
Scotiabank's provisions for credit losses rose to C$159 million, from C$92 million, and its executives told a conference call they expect to see "moderate increases" in these provisions in the medium term, both in Canada and elsewhere.
For example, the credit environment in Mexico is expected to be "challenging" for the next three to four quarters, said Brian Porter, Scotiabank's chief risk officer.
While analysts expect all the Canadian banks to lift provisions for loan losses after several years of very low levels, BMO surprised the market by boosting its specific provisions to C$434 million from C$91 million a year earlier.
Provisions were "unusually elevated" and BMO cited deteriorating U.S. real estate markets.
BMO Chief Financial Officer Russ Robertson said that if provisions were at "a more normal level" and other adjustments were made, the bank's "sustainable earnings" in the present market environment would be C$1.20 to C$1.30 a share. Its quarterly cash EPS of C$1.00 was well below analysts' estimates for C$1.20.
Some saw BMO's results as heralding trouble for two other Canadian banks with substantial U.S. operations -- Royal Bank of Canada and Toronto-Dominion Bank. They are due to report results on Thursday, after Canadian Imperial Bank of Commerce on Wednesday.
But one analyst said that BMO's higher loan-loss provisions stemmed mainly from the bank's U.S. asset-backed commercial paper conduit, called Fairway.
"The other banks will have higher provisions for credit losses too, but I think this is very specific to BMO because it's Fairway that's causing the problem here," said Mario Mendonca at Genuity Capital Markets.
Investors are looking for signs of how well the banks' domestic retail businesses are holding up, with an economic slowdown emerging at home.
BMO noted that the domestic economy is expected to grow just 1 percent in 2008, which would be the slowest since 1992.
"People are really going to be watching what's happening on the domestic side," said Julie Brough, a vice-president at Morgan Meighen & Associates.
Scotiabank's domestic unit reported record net income of C$455 million this quarter, up 16 percent.
At BMO, domestic retail banking profit fell 3 percent to C$343 million, although the bank's Canadian business combined with its domestic private client business earned C$450 million, up 2 percent, according to Merrill Lynch analyst Sumit Malhotra.
"This marks a noticeable deceleration versus the strong 9.5 percent growth rate posted last quarter, and supports our view that the flagship franchises of the Canadian banks are in for a period of softer growth, given the pressure on the top line," Malhotra said in a research note.
Additional reporting by Leah Schnurr and Jennifer Kwan; editing by Rob Wilson