08/28/2012 05:18 EDT | Updated 10/28/2012 05:12 EDT

BMO and Scotiabank surprise with double-digit earnings growth in third quarter

TORONTO - Two of Canada's biggest banks surprised analysts Tuesday with stronger-than-expected third-quarter earnings and dividend boosts.

But the earnings increase at the Bank of Montreal (TSX:BMO) was largely due to gains at its U.S. operations and a decline in provision for credit losses, while at Scotiabank (TSX:BNS), the sale of its Toronto headquarters accounted for the lion's share of double-digit growth.

The first two Canadian banks to report third-quarter earnings — the rest release results Thursday — have also been able to beat expectations because analysts aren't looking for much growth in the current global economic climate.

And while Canadian banks have outperformed their peers during this period of uncertainty, investors should brace themselves for relatively slow growth ahead, as the global economy continues to lurch along, said Craig Fehr, Canadian markets specialist at Edward Jones in St. Louis.

"What you see is they beat the numbers, (but) expectations were relatively subdued," he said.

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

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.

Scotiabank 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 at BMO was $970 million or $1.42 per share, an increase from $708 million, or $1.09 per share, a year earlier. On an adjusted basis, earnings of $1.01 billion, or $1.49 per share, beating analyst expectations by 10 cents a share.

The results were largely boosted by a 34 per cent jump at its U.S. operations, as well as from a $129 million decline in adjusted provisions for credit losses to $116 million.

Revenue increased to $3.88 billion from $3.32 billion.

At Scotiabank, 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. Scotiabank's adjusted income was $1.22 per share, while analysts had expected earnings of $1.19 per share.

Revenue increased to $5.51 billion from $4.3 billion.

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.

Scotia's PCLs increased to $402 million, up $152 million from a year earlier.

"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.

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, adding that Scotia's underlying earnings were actually better than BMO's.

"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 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.