* Q2 EPS C$1.54 vs C$1.02 year earlier
* Q2 EPS excluding one-time items C$1.10
* Lending grew but rate slowed; outlook cloudy
* Declares quarterly dividend of C$0.52/shr
* Shares up slightly in morning trade (Adds analyst, CEO comment, estimates, share price move)
By Euan Rocha
TORONTO, May 31 (Reuters) - Bank of Nova Scotia's (BNS.TO) profit rose sharply and topped expectations as Canada's No. 3 bank increased lending in its second quarter and cut back on provisions for older loans that soured.
The results, which sent Scotia's shares higher on Tuesday, largely mirrored trends reported by its rivals last week. Domestic lending grew again in the three months ended April 30 but the rate slowed and margins came under pressure as competition among banks intensified.
Canada's conservative banks benefited in recent quarters from a strong rebound by an economy that had come through the financial crisis with relative ease. But tighter lending rules and the prospect of higher interest rates are now beginning to temper loan growth, clouding the outlook for the sector.
On the plus side, Scotiabank's fiscal second-quarter also benefited from strength in wealth management, increased investment banking and securitization revenue, and a lower effective tax rate. Those factors more than offset the impact of the lower margins in domestic banking.
"Scotia ran into similar challenges faced by the other banks, including domestic margin pressure and slowing volume growth," wrote Barclays Capital analyst John Aiken in a note to clients.
"However, there were some relative positives for Scotia," he said. "Capital markets performance was stronger than we have seen against expectations, but we do note that Scotia benefited from higher than anticipated securities gains."
Net income in the quarter ended April 30 rose to C$1.54 billion, or C$1.36 a share, from a year-earlier profit of C$1.10 billion, or C$1.02.
Excluding one-time gains from new accounting standards, earnings the quarter rose to C$1.10 a share. Analysts on average had expected earnings of C$1.08 a share, according to Thomson Reuters I/B/E/S.
The bank said provisions for bad loans dropped to C$262 million from C$338 million.
"Our Tier 1 capital ratio remains strong at 12 percent, which enables us to invest in growth and ensures we are able to meet future regulatory changes," Chief Executive Rick Waugh said in a statement, referring to a key measure of a bank's financial strength.
Bank of Nova Scotia is the last of Canada's big six banks to report fiscal second-quarter results.
Bank of Montreal (BMO.TO) early last week was the first of Canada's big banks to post results, reporting stronger-than-expected profit that heightened investor expectations.
A letdown came when Royal Bank of Canada (RY.TO), National Bank of Canada (NA.TO) Canadian Imperial Bank of Commerce (CM.TO) and Toronto-Dominion (TD.TO) reported their results, and shares across the sector dropped.
Scotia's stronger-than-expected results pushed its shares up 31 Canadian cents to C$59.29 in morning trading on Tuesday, on the Toronto Stock Exchange. (Reporting by Euan Rocha; Editing by Frank McGurty)