* Core profits top estimates, net results slip
* RBC, TD raise dividends
* Capital markets profit falls
* TD profit hit by litigation reserve
* Shares of both banks rise
By Cameron French
TORONTO, March 1 (Reuters) - Strong mortgage lending helped drive quarterly profits above expectations at three of Canada's big banks, allowing the country's two biggest lenders to raise dividends and showing that Canadian consumers are still borrowing in droves.
Shares of top lenders Royal Bank of Canada and Toronto-Dominion Bank surged on the news of the higher lending, which follows warnings from federal officials that consumer debt levels are dangerously high.
National Bank of Canada, the country's sixth-largest bank, released its results after markets closed, and was the only one of the three to not raise its dividend.
"It seems to be that at today's low level of interest rates there's additional capacity for lending to households, and that the banks are looking to fill it," said Peter Routledge, an analyst at National Bank Financial.
Net income from continuing operations at RBC, Canada's largest bank, eased by 6 percent to C$1.88 billion ($1.91 billion), or C$1.23 a share, from C$2.00 billion, or C$1.31 a share, a year earlier.
The result excluded an additional C$21 million loss from RBC's U.S. retail unit, which it agreed to sell last year. That deal is expected to close on Friday.
Excluding other items, profit was C$1.25 a share, topping analysts' forecasts for a profit of C$1.13.
At TD Bank, net income was C$1.48 billion, or C$1.55 a share, down 5.1 percent from C$1.56 billion, or C$1.67 a share, a year earlier.
Hurting the result was a C$171 million litigation reserve set aside to cover costs related to a $1.2 billion Ponzi scheme run by Florida lawyer Scott Rothstein.
TD was ordered to pay $67 million in January after losing a Miami verdict related to its involvement in the case, and then settled a separate lawsuit in February.
Excluding that and other items, the bank earned C$1.86 a share. Analysts on average had expected C$1.76, according to Thomson Reuters I/B/E/S.
National, which does much of its business in the Canadian province of Quebec, earned C$332 million, or C$1.99 a share, up from C$322 million, or C$1.86 a share, in the year-before period.
Excluding items, it earned C$2.00 a share, easily beating analyst expectations of a profit of C$1.82 a share due largely to strong trading revenues and gains on securities.
Royal Bank's domestic banking income rose 7 percent to a record C$994 million, helped by higher lending volumes and credit quality, but offset by narrower interest margins.
Analysts and bank executives had warned of slowing consumer loan growth due to several factors, including record levels of consumer indebtedness, a slowly recovering economy, and warnings from government officials that borrowing is hitting dangerous levels.
Royal said loan growth was "across the board", but acknowledged that consumers are becoming more cautious, particularly with their credit cards.
Profit was hit by a 30 percent drop in capital markets income to C$448 million, as trading revenues weakened following an abnormally strong period in early 2011. However, the results were stronger than during the fourth quarter and were ahead of analysts' modest expectations.
The strength of its results prompted Royal to boost its quarterly dividend by 6 percent to 57 Canadian cents a share, while TD increased its payout by 6 percent to 72 Canadian cents a share.
"We think that the trend (in Canadian banking) is fairly positive and I don't think they would have raised their dividends if they didn't think the same," said David Baskin, president of Toronto-based Baskin Financial Services.
TD CEO Ed Clark said the dividend hike in part represented "playing catch-up" after the bank's payout ratio fell out of its target range last year.
He was also less cautious on the bank's consumer lending profits, noting that the continuing shakiness of the U.S. and European economies is expected to keep interest rates low for the foreseeable future.
"The slow recovery in both geographies will mean lower rates for longer periods of time which will negatively impact our net interest margins for at least he next couple of years," he said, calling this the "core challenge" for Canadian banks.
This puts the focus on controlling costs, he said.
Income from the bank's flagship Canadian banking unit rose 11 percent, helped by lending growth, particularly on the business side. U.S. retail banking income from TD's 1,300-strong branch network climbed 8 percent to $352 million, excluding the litigation reserve.
TD Chief Financial Officer Colleen Johnston said the result reflected a better than expected recovery in the U.S. financial sector.
TD's capital markets-related income slid 17 percent to C$194 million from the abnormally strong first quarter of 2011.
RBC's shares ended the session up 2 percent at C$56.80, while TD climbed 1.4 percent to C$82 on the Toronto Stock Exchange.