(Reuters) - Bank of Montreal's (BMO.TO) profit topped expectations for the first quarter as lower losses for bad loans and a revenue boost from last year's acquisition of U.S. bank Marshall & Ilsley more than offset weaker capital markets income.
The result, which drove BMO's shares up by 1 percent on Tuesday, comes as bank executives are trying to control costs due to concerns that consumer lending will dry up and lending profit margins will narrow.
As expected, personal and commercial lending at the bank's flagship Canadian operation dipped year-over-year. But interest margins narrowed less than expected, and even rose from the fourth quarter.
"(Net interest margin) was a real positive in Canada," said National Bank Financial analyst Peter Routledge.
All told, Canada's No. 4 bank earned C$1.1 billion ($1.1 billion), or C$1.63 a share, up 34 percent from a year-earlier profit of C$825 million, or C$1.34 a share.
Adjusted profit was C$1.42 a share, topping analysts' average estimate of C$1.36 a share.
Weighing on the result was a 24 percent drop in income from BMO's capital markets division. Investment banking and trading revenue had been expected to pale next to an abnormally strong quarter a year earlier, but nevertheless fell short of what analysts had expected.
The M&I acquisition, which the bank closed in July, helped boost profit from BMO's U.S. retail banking division to C$137 million during the first quarter from C$54 million a year earlier.
As well, BMO was able to cut the provisions it sets aside to cover bad loans due to the unexpected paydown of loans acquired in the M&I deal that had originally been classified as impaired.
Speaking on a conference call, Chief Risk Officer Surjit Rajpal said it was difficult to gauge whether to expect more returns on U.S. impaired loans in future quarters.
"It's very difficult to predict paydowns," he said. "The pace may not be sustainable, but clearly it helped us this quarter."
All told, BMO's provisions for bad loans fell to C$141 million from C$323 million.
The M&I acquisition is one of several small to medium-sized purchases by Canadian banks over the last two years as they have used their financial strength to snap up struggling smaller lenders or assets cast aside by larger players looking to cut costs.
In addition to building on its U.S. presence, BMO has been widening its modest footprint in China, most recently agreeing to buy a stake in China's COFCO Trust Co, a unit of state-owned COFCO Group CNCOF.UL, to expand its offerings to high net worth and institutional clients.
Shares of BMO, the first Canadian bank to report first quarter results, rose 55 Canadian cents to C$58.56, outperforming most of its Toronto-listed rivals.
"Overall, it was a solid, if uninspiring start to the earnings season," Barclays Capital analyst John Aiken said of the BMO results.
"That said, the lower provisions and higher trading revenues (versus the fourth quarter) could benefit the earnings of the other banks, if it is truly systemic as opposed to BMO-specific," he said.
Analysts have predicted relatively strong results for the quarter, but expect revenue growth to be difficult through the remainder of the year due to an expected consumer loan slowdown.
High consumer debt levels have prompted officials such as Bank of Canada Governor Mark Carney to warn Canadians to watch their borrowing habits, while still-rising home prices have raised concerns of a housing bubble, particularly in hot condo markets in Toronto and Vancouver.
Officials on the call said BMO has C$10 billion in total exposure to the mortgage market, including C$3 billion in exposure to investor-owned condos, which are considered at higher risk of default.
The bank held its quarterly dividend steady at 70 Canadian cents per share.
BMO is the only Canadian bank that has not resumed dividend hikes in the wake of the 2008 financial crisis, preferring to spend its money on the $4.1 billion M&I takeover.
Reporting By Cameron French; Editing by Janet Guttsman and Peter Galloway