Two of Canada's biggest banks surprise analysts with dividend increases

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TORONTO - Two of Canada's biggest banks surprised analysts Tuesday with stronger-than-expected third-quarter earnings and dividend boosts, with one bank raising its payout for the first time in five years and the other for the second time just this year.

Bank of Montreal (TSX:BMO) raised its quarterly dividend for the first time since 2007 — a bump of two cents to 72 cents per share — as it posted a 37 per cent increase in profits.

"This was much sooner than we had been anticipating," said Barclays Capital analyst John Aiken.

The bank said net income was $970 million or $1.42 per share, an increase from $708 million, or $1.09 per share, a year earlier.

Scotiabank (TSX:BNS) lifted its dividend by two cents to 57 cents per share while its profits grew by 57 per cent — helped by a $614 million after-tax gain from the sale of its downtown Toronto headquarters, Scotia Plaza. Scotia also boosted its dividend in March.

Net income came in at $2.05 billion, or $1.69 per share, up from $1.3 billion, or $1.10 per share, a year ago.

But despite the fanfare around the higher dividends, analysts expressed cautioned over the actual results.

"What you see is they beat the numbers, (but) expectations were relatively subdued," said Craig Fehr, Canadian markets specialist at Edward Jones in St. Louis.

"If you look at year on year growth, it's around the lowest levels that we have seen from them in some time."

Scotiabank's Core EPS, a measurement the bank says best compares with analyst predictions, was $1.22 per share. A survey by Thomson Reuters had shown analysts, on average, expected earnings of $1.19 per share.

Revenue increased to $5.51 billion from $4.3 billion.

However, provisions for credit losses, or the money set aside for bad loans, increased to $402 million, up $152 million from a year earlier.

Scotiabank was expected to perform better than most of its peers, helped by international operations that soften negative impacts in Canada.

The bank said its Canadian operations saw profits rise to $521 million from $426 million, while international banking operations posted net income of $442 million from $343 million.

Revenue in that division was up 27 per cent year over year but was largely offset by an increase in expenses, mostly due to acquisitions.

Aiken called the international results "disappointing" but he believes the negative sentiment could subside.

"As the dust settles, we believe that the market will eventually view Scotia’s results as relatively firmer than Bank of Montreal’s and would view any significant relative performance as an interesting entry point," he wrote in a note.

BMO, meanwhile, saw adjusted earnings of $1.01 billion, or $1.49 per share, beating analyst expectations by 10 cents a share, according to a survey by Thomson Reuters.

Adjusted results factor in the acquisition of U.S. bank Marshall & Ilsley Corp. last year, where it posted a recovery related to its purchased credit impaired loans, which helped drive results higher.

Revenue increased to $3.88 billion from $3.32 billion.

The first two banks to report third-quarter earnings — the rest release results Thursday — have also been able to beat analysts' expectations because they're not looking for much growth given that the direction of the global economy remains a question mark.

While much of BMO's improvement came from its decreased provisions for bad loans, Scotiabank, which recently conducted a review of potential fallout from the debt crisis in Europe, decided to set aside more money for bad loans in case the crisis spreads.

"We've done a series of stress tests over a long period of time now in various forms and concluded that there's a possibility that there could be an impact of contagion and that contagion would have an impact on the various business lines," said Rob Pitfield, Scotia's chief risk officer.

The slower economic environment has left the banks to compete fiercely to attract new mortgage customers and other new loans as the consumer lending market tightens.

Frank Techar, BMO's president and CEO for personal and commercial banking Canada, noted that competitive pressures continue to impact the company's bottom line.

"We saw one element of our margin compression this quarter was the competitive dynamic, and our expectation is that that's going to continue, but I'm not seeing an acceleration of that, or at least we didn't in Q3," he said.

BMO shares gained 23 cents to close at $57.93 Tuesday on the Toronto Stock Exchange, while Scotiabank’s shares lost early momentum to move down four cents to $52.90.

Organizations: BMO, Scotiabank, Bank of Montreal TSX Barclays Capital Thomson Reuters BNS U.S. bank Marshall Ilsley Toronto Stock Exchange

Geographic location: Canada, TORONTO, St. Louis Europe

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