* Q2 EPS C$1.26 vs C$0.61 a year earlier
* Q2 cash EPS C$1.28 surpasses C$1.10 EPS expectations
* Provisions for credit losses fall 33 pct to C$249 mln
* Shares up 3.3 percent in early trade (Adds analyst's comments, share price, byline)
By Andrea Hopkins
TORONTO, May 26 (Reuters) - Bank of Montreal (BMO.TO) said on Wednesday its profit doubled in the second quarter as loan losses fell and capital markets surged, surpassing market expectations.
The surprisingly strong results kicked off Canada's bank earnings season with a bang and raised expectations for better credit quality at all of Canada's big lenders, most of which report quarterly results this week.
It was the fifth straight quarter of higher revenues and net income for Toronto-based BMO, which has retail and wholesale banking operations across Canada and the U.S. Midwest. Its shares rose 3.3 percent in early Toronto trade.
"While always difficult with only one bank reporting (compounded by the fact that there is only one trading day before the bulk of the group reports), we believe that BMO's results set a very positive tone for earnings this quarter," Barclays Capital analyst John Aiken wrote in a research note.
While all of the big lenders will likely benefit from lower loan losses after suffering from consumer and business defaults during the recession, Aiken noted that BMO has outperformed rivals over the past two quarters.
"While it does look like the banks can exceed consensus based on BMO's results, if the previous quarters are an indication, the remaining banks may not generate the same strength in their positive surprises," he said.
BMO, Canada's fourth-largest bank, said it had net income of C$745 million ($702 million), or C$1.26 a share, for the quarter ended April 30. That's up from C$358 million, or C$0.61 a share, a year earlier.
Cash earnings per share were C$1.28, up from 63 Canadian cents in the second quarter of 2009. That was well above the C$1.10 per share profit expected by analysts, according to Thomson Reuters I/B/E/S.
BMO's Canadian operations once again powered earnings, with profit up 16 percent from a year earlier to C$396 million.
The capital markets segment was also strong, with profit rising 38 percent to C$259 million. Canadian banks bulked up on their wholesale banking operations, which include lucrative trading arms, during the global financial crisis when rivals were reeling.
BMO's U.S. operations, which are concentrated in the U.S. Midwest through the bank's Chicago-based Harris Bank subsidiary, were a weak spot. Net income fell 31 percent to US$45 million from the second quarter of 2009.
BMO has been stung by higher loan losses in the United States relative to its Canadian operations as U.S. consumer and business borrowers struggle with the slower U.S. recovery.
The bank has said it is retooling its U.S. operations to focus on commercial lending. Under the restructuring, corporate customers will be moved to the bank's commercial lending arm.
BMO said provisions for credit losses, or the amount of money the bank set aside to cover bad loans, fell to C$249 million, down C$123 million from a year earlier.
Credit losses ate into bank profits in 2009 as consumers and businesses struggled to repay debts during the recession, but conditions improved in the first quarter and analysts had expected further improvement in the last three months.
Tier 1 capital was 13.3 percent, at the high end of Canadian peers and well above that of most global rivals.
The quarterly dividend was unchanged at 70 Canadian cents a share, as expected.
Harris Bank in April completed the FDIC-assisted acquisition of AMCORE Bank N.A. in Illinois and Wisconsin. While the deal was not expected to be material to BMO's earnings, the bank has said it is eager to increase its geographic footprint across the U.S. Midwest.
Canada's other big banks are due to report this week and next. Canadian Imperial Bank of Commerce (CM.TO), Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO) and National Bank of Canada (NA.TO) report on Thursday. Bank of Nova Scotia (BNS.TO) caps the earnings season on June 1.
Shares of all of the banks were up in early Toronto trade on Wednesday in a stronger overall market.
$1=$1.06 Canadian Reporting by Andrea Hopkins, editing by Dave Zimmerman and Peter Galloway