* Q2 shr C$0.76 vs yr-earlier C$0.93
* Q2 credit loss provision C$12 mln, up C$2 mln
* Shares fall 3.8 pct to C$29.57 (Adds CEO comment from conference call)
By Andrea Hopkins
TORONTO, May 27 (Reuters) - Laurentian Bank of Canada (LB.TO) reported a 16 percent drop in quarterly profit on Wednesday as provisions for bad loans rose and interest income declined, sending shares lower
The Montreal-based regional bank reported strong loan and deposit growth, but overall results came in below market expectations.
Still, the head of Canada's eighth-largest bank suggested the second-quarter may represent the bottom of Laurentian's profitability cycle, saying a rise in interest income and more loan growth looked likely in the months ahead.
"We believe that our 2009 objectives continue to be achievable given the measures undertaken in first half of the year to improve the bank's performance," Chief Executive Rejean Robitaille told analysts on a conference call.
Laurentian reported net income of C$21.2 million ($19.1 million), or 76 Canadian cents a share, for its second quarter ended April 30. That compared with net income of C$25.1 million, or 93 Canadian cents, in the same period a year earlier.
Analysts had expected a profit of 82 Canadian cents a share, according to Reuters Estimates.
Laurentian said the money it set aside to cover bad loans rose 20 percent to C$12 million in the quarter, a modest increase given the economic slump that has increased loan losses at many Canadian banks.
As unemployment rises, consumers and businesses struggle to repay debts and banks worldwide have ratcheted up their provisions for credit losses to account for nonpayment.
Macquarie Securities analyst Sumit Malhotra said Laurentian is doing better than industry peers in terms of credit quality and remains well-capitalized.
"Though the outsized (earnings per share) growth rate has stalled, we believe the bank has a relatively safer credit profile, and also boasts strong capital ratios," Malhotra said in a research note.
Laurentian reported a Tier I capital ratio of 10 percent -- well above regulatory requirements and above the ratio of global competitors.
The bank, which has the third-largest branch network in Quebec, said total revenue was essentially flat in the second quarter at C$154.8 million as a decline in net interest income was mostly offset by growth in other income.
Net interest income fell to C$94.1 million in the quarter from C$99.0 million in the year-earlier period as lower interest rates and more pressure on pricing offset higher loan and deposit volumes.
But Robitaille said loans in the pipeline for the remainder of 2009 remain strong, setting the stage for another record year for loan and deposit growth.
Banks make money by borrowing money cheaply -- ideally from consumer deposits -- and then lending it at higher interest rates. But interest rates have declined as Canada and the United States struggle with recession and central banks cut official rates to zero.
Laurentian said net interest margins stood at 1.92 percent in its second quarter, down from 2.23 percent a year earlier. But the bank said margins had begun to improve late in the quarter, averaging 2.01 percent in April.
"The additional disclosure on (net income margins) indicates that the declining trend in net interest income ... should reach its low point this quarter. Given that net interest income accounts for about 60 percent of total revenue at Laurentian, this is a positive development," Malhotra said.
Looking ahead, Laurentian said it is targeting diluted earnings per share of C$3.70 to C$4.40 and total revenue growth of between 2 percent and 5 percent for fiscal 2009. At the midpoint of its fiscal year, the bank had notched earnings per share of C$1.68 and 1.5 percent growth in revenue.
Laurentian's stock was down 3.8 percent at C$29.57 in afternoon trade on the Toronto Stock Exchange.
$1=$1.11 Canadian Reporting by Andrea Hopkins, editing by Frank McGurty