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* Q4 EPS C$1.11, above estimates, vs year-earlier C$1.06
* Announces deal to buy Diners Club from Citigroup
* Loan loss provisions C$386 mln vs year-earlier C$465 mln
* Shares down in late trade as banking sector ebbs (Adds CEO comment from conference call, analyst comment. In U.S. dollars unless noted)
By Andrea Hopkins
TORONTO, Nov 24 (Reuters) - Bank of Montreal (BMO.TO) reported a higher-than-expected quarterly profit on Tuesday and said it was buying the Diners Club North America credit card business to double its corporate card portfolio.
The deal, combined with a 16 percent rise in quarterly earnings, emphasizes the relative strength of Canada's big lenders as they emerge from the financial crisis with excess capital and solid balance sheets.
BMO, Canada's fourth-largest bank, kicked off the earnings season for the big banks with net income of C$647 million ($610 million), or C$1.11 a share, for its fourth quarter ended Oct. 31, up from C$560 million, or C$1.06, a year earlier.
That was well above analysts' average estimate of 98 Canadian cents a share, according to Thomson Reuters I/B/E/S, but BMO's shares -- like those of rival banks -- were little changed in trade on the Toronto Stock Exchange.
BMO set aside less money for bad loans, trimmed expenses and boosted profit despite a drop in trading revenues from recent record levels. Analysts said BMO's performance bodes well for the rest of Canada's big banks, which report over the next two to three weeks.
"The main thing going into this quarter was going to be credit performance and if we look at the headline number in provisions for credit losses, it was pretty good," said Edward Jones analyst Craig Fehr.
"One quarter a trend does not make, so I'll be looking at the credit performance of all the Canadian banks, because I don't think it necessarily declares the end of the credit headwinds by any stretch, but it is a positive."
Chief Executive Bill Downe said the bank will hold onto its huge capital reserves until there is some certainty about global regulatory requirements, but noted BMO's 12.2 percent Tier I capital ratio gives it a lot of flexibility to boost earnings when the time is right, likely through acquisition.
"The good news ahead is that we have flexibility around any new regulatory reform that may emerge, and equally important, we are well positioned to deploy capital for growth initiatives and take advantage of opportunities that arise," Downe told analysts on a conference call.
Minutes before announcing the surprisingly strong results, Toronto-based BMO said it was buying Diners Club North America credit cards from Citigroup Inc (C.N) [ID:nN24290954].
The deal gives BMO exclusive rights to issue Diners Club cards in the United States and Canada. It will also more than double BMO's corporate card business, as many business travelers use Diners Club cards.
The terms of the deal were not disclosed.
While BMO said the deal would add nearly $1 billion of receivables and $7.8 billion of card transactions, Barclays Capital analyst John Aiken said the acquisition was more about BMO's attempts to make further inroads in the U.S. market than about a grab for earnings power.
"While this may not be overly material to earnings -- representing less than 2 percent of BMO's business lending portfolio -- we do view it as an opportune expansion that leverages its Canadian/U.S. platforms," Aiken said in a research note.
Diners Club is well-known to U.S. consumers, while BMO is far from a household name, despite its big presence in the U.S. Midwest through its Chicago-based Harris Bank unit.
Earnings for the fourth quarter showed strength across most of BMO's business lines and geographies.
Macquarie analyst Sumit Malhotra said BMO's "beat" in the quarter was driven by expense management, noting total expenses of C$1.9 billion were down 5 percent from the third quarter.
"We view this as another 'grind-it-out' quarter of respectable profitability for BMO," Malhotra wrote in a research note.
The amount the bank set aside to cover bad loans fell to C$386 million from C$465 million, a sign that credit woes may be easing as the recession recedes, at least in Canada.
The dividend was unchanged at 70 Canadian cents per common share, as expected.
Net income in Canadian retail banking rose 22 percent to C$394 million in the quarter from a year earlier, as revenue increased across personal, commercial and cards businesses.
Income on the capital markets side was stagnant. It edged down to C$289 million from C$290 million, ending a string of big quarterly increases.
Shares in BMO were down 0.4 percent at C$53.34 in late afternoon trade on the Toronto Stock Exchange, while the broad financial index was down 0.1 percent.
$1=$1.06 Canadian Additional reporting by Euan Rocha in Toronto and Dan Wilchins in New York; Editing by Peter Galloway firstname.lastname@example.org; +1 416 941 8159; Reuters Messaging:email@example.com