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A Bank of Montreal location in Toronto.Deborah Baic/The Globe and Mail

Bank of Montreal and Bank of Nova Scotia surprised investors with higher-than-expected profits and dividend increases – a sign that Canadian banks are confident enough with the economic picture to return more cash to their shareholders.

A week after Bank of Canada Governor Mark Carney criticized Canadian companies for sitting on piles of "dead money," BMO raised its quarterly dividend almost 3 per cent to 72 cents a share. Scotiabank followed suit by boosting its dividend 3.6 per cent to 57 cents.

BMO had been the only one of Canada's six largest lenders to have not increased its dividend since the 2007 financial crisis, when a freeze on such hikes was imposed to preserve capital and make their balance sheets stronger.

The moves came after Scotiabank and BMO both surpassed analysts' forecasts for the third quarter.

The results show that despite persistent warnings from Ottawa about household debt levels, the banks are showing few signs of financial stress from consumers, and they are continuing to provide more money to Canadians the form of mortgages, credit cards and lines of credit.

Scotiabank, Canada's third-largest lender, posted third-quarter profit of $2.05-billion on Tuesday, helped by the recent sale of its head office in Toronto, Scotia Plaza.

Excluding the sale of the building, which it will now rent, earnings were up 11 per cent from a year ago.

"The continued low interest rate environment and reasonable economic performance will allow consumers to manage debt levels well," Rob Pitfield, Scotiabank's chief risk officer, told analysts on a conference call. He added that he expects provisions for soured loans to remain stable, and that losses have been extremely small.

BMO's quarterly profit of $970-million, a 37 per cent increase from the same quarter a year ago, was helped by increased earnings from its U.S. operations, and lower losses on bad loans.

The banks are increasing their lending, but the average profit margins on each loan are suffering because of low interest rates and other factors.

Scotiabank saw double-digit growth in credit card accounts this quarter, although executives suggested most customers are paying off their balances, as opposed to using them to finance longer-term purchases. Anatol von Hahn, Scotiabank's head of Canadian banking, said he expects that mortgages, unsecured lines of credit and credit cards will continue to grow, but not quite as quickly as they have been.

The dividend increases also show a degree of confidence from the banks that their revenue will remain strong, even though margins are slimming.

However, the banks are still taking a decidedly conservative approach in their payouts to investors. Though BMO finally ended its long streak without an increase, chief executive officer Bill Downe said the bank is now planning to pay out between 40 and 50 per cent of earnings in dividends, down from a target of 45 to 55 per cent before.

The move brings BMO's payout range in line with most of the other major banks, and will give the bank more flexibility, Mr. Downe said. However, rather than a strategy to preserve capital, the bank wants to invest more funds in its operations, including branches, technology and marketing. It may also want to keep more cash around for potential acquisitions, Mr. Downe said.

"Today there is no question that in the market, the strongest banks have the opportunity to grow their businesses," Mr. Downe said in an interview of the potential for acquisitions. "If you go back to 2005, the market was starting to say where are the investment opportunities? Today there are plenty of them."

With the Canadian operations of ING Direct Canada up for sale, it is expected several major Canadian banks will consider a bid for the assets. However, it is believed BMO's priorities for acquisitions are to build out its U.S. banking business in the Midwest, after purchasing Wisconsin-based lender Marshall & Ilsley Corp. last year.

Bank of Nova Scotia has been mentioned as a possible suitor for ING's Canadian business as well. The assets of the Dutch bank are being put up for sale as the parent company looks to shore up its capital levels and divest non-core assets. On Tuesday, Scotiabank indicated it is looking for deals, but that they might be international assets.

"We're always looking at acquisitions," said Brian Porter, Scotiabank's head of international banking. "Acquisitions have been a key part of the international strategy to build out our franchise. We continue to look at them and as you would expect in current economic conditions there are some businesses available."