* Q3 ex-items EPS C$1.72 vs est C$1.62
* Raises dividend 3 pct to C$0.68
* Shares rise 1.5 percent to C$78.60
* TD briefly eclipses RBC as Canada's largest company (Adds CEO comments, updates share price)
By Cameron French
TORONTO, Sept 1 (Reuters) - Toronto-Dominion Bank (TD.TO) reported a higher-than-expected quarterly profit and boosted its dividend on Thursday, driving its shares higher and allowing it to briefly supplant Royal Bank of Canada (RY.TO) as Canada's largest company by market value.
The result -- driven by strong loan volumes in the United States and Canada -- cap a relatively strong fiscal third quarter for Canada's big banks although economic turmoil and European debt problems promise difficulties ahead.
Profit at TD's flagship Canadian retail bank operations rose 13 percent due to loan and deposit growth, while its U.S. retail bank -- among the top 10 in the United States after six years of expansion -- had a 21 percent jump in profits.
Wealth management income rose 26 percent year-over-year.
"The asset growth was very strong," said CIBC World Markets analyst Robert Sedran. "The results out of the U.S. in particular are very encouraging."
The loan growth was partly offset by the impact of narrow interest margins, a problem that is likely to persist as interest rates stay low.
Wholesale banking profits dropped 40 percent as fixed income trading suffered.
TD's shares rose as much as 3.2 percent, pushing its market capitalization past RBC's for a short time around midday. They ended the session up 1.5 percent at C$78.60 on the Toronto Stock Exchange.
The bank said earnings growth should moderate in coming quarters due to slower growth in loan volumes and increasing margin pressure as central bankers keep interest rates low.
Indeed, the entire industry is facing "headwinds" that promise to make the coming year a challenging one for the banks, TD officials said.
"Europe clearly still has a long way to go to resolve its debt issues, and the outlook for the United States in terms of economic growth has definitely become more bearish," TD Chief Executive Ed Clark said on a conference call.
CIBC analyst Sedran agreed there are leaner times ahead for the industry. "The next four quarters will not be as powerful as the last four quarters for the sector," he said.
TD's U.S. bank will also face industry caps on debit card fees. The so-called Durbin amendment will cost the bank $50 million to $60 million in pretax revenue a quarter, Clark said. He said it would likely take two years to recover the costs through repricing.
However, he said the U.S. unit still expects to reach its profit goal of $1.6 billion by 2013.
Net profit rose 23 percent to C$1.45 billion ($1.48 billion), or C$1.58 a share, in the quarter to July 31, up from C$1.18 billion, or C$1.29 a share, a year earlier.
Stripping out special items, the bank earned C$1.72 a share, handily beating analysts' expectations of C$1.62.
TD raised its dividend by 3 percent to 68 Canadian cents a share, the second Canadian bank to do so this quarter.
As well as its Canadian and U.S. retail banks, TD owns a 44 percent stake in online brokerage TD Ameritrade (AMTD.O).
TD closed a US$6.3 billion purchase of Chrysler Financial earlier this year and agreed in early August to buy Bank of America's (BAC.N) US$8.6 billion Canadian credit card portfolio.
TD CFO Colleen Johnston acknowledged that weakness in the U.S. financial sector has provided opportunities for TD to expand and could continue to do so.
"If we like the business and we think there's franchise value, we would definitely consider acquisitions that are financially and strategically compelling," she said.
$1=$0.98 Canadian Reporting by Cameron French; editing by Peter Galloway