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

Bank of Montreal's profit rose 37 per cent in the third quarter, as Canada's fourth-largest bank increased its dividend for the first time in nearly five years and beat analysts' expectations for the quarter.

BMO made $970-million, or $1.42 a share, compared to $708-million, or $1.09 a share during the same period last year.

The profit increase was driven by higher earnings from its U.S. personal and commercial bank operations, and a drop in loan-loss provisions. Profit at the U.S. operations rose 34 per cent after BMO acquired Wisconsin-based lender Marshall & Ilsley Corp. last summer, while adjusted loan-loss provisions, or the amount of money the bank set aside to cover bad loans, fell to $116-million from $245-million. However, BMO's profit was hurt by a sluggish quarter from its capital markets division, as earnings in that division fell 14 per cent from a strong quarter a year ago.

Revenue for the third-quarter rose 17 per cent to $3.78-billion.

BMO boosted its quarterly dividend to 72 cents, an increase of 2 cents. The 3-per-cent hike in the quarterly payout is the first such increase since late 2007. BMO was the only one of Canada's major banks to have not hiked its dividend since the payouts were put on hold during the credit crisis.

Adjusted earnings, which primarily include the impact of the U.S. acquisition, were up 18 per cent in the quarter to $1.01-billion, or $1.49 a share. Marshall & Ilsley Corp. contributed one month of earnings a year ago compared to a full quarter this year.

The earnings beat analysts' estimates. On an adjusted basis, analysts were expecting BMO to earn about $1.38 a share.

"We increased the dividend, reflecting our strong capital position and our confidence in our continued ability to generate sustained earnings growth," BMO chief executive officer Bill Downe said in a statement accompanying the earnings.

BMO also adjusted its dividend payout ratio to between 40 and 50 per cent of earnings, dropping it from the previous range of 45 to 55 per cent. Mr. Downe said the adjustment "gives us more flexibility to grow the bank."

Before the dividend increase, BMO's payout ratio was 51.3 per cent, Macquarie Capital analyst Sumit Malhotra said in a research note to clients.

Though the bank had not increased its dividend in years, in part to preserve cash after expanding in the U.S., the hike was considered a surprise by some analysts. John Aiken at Barclays Capital said in a note to clients that the dividend increase came "much sooner than we had been expecting."

BMO's profit increase in the quarter was driven mostly by higher earnings from its U.S. consumer branch network, as the bank's Canadian growth slowed, a trend analysts have been expecting across the sector as demand for loans cools.

BMO's core Canadian retail bank made $453-million, an increase of 2.4 per cent. The smaller U.S. retail bank made $129-million, which was up nearly 43 per cent due to the acquisition of M&I.

BMO's capital markets division made $232-million, down 14 per cent, from a strong quarter last year. The bank's private client division made $109-million, up nearly 6 per cent.

"BMO has reported strong quarterly financial results," Mr. Downe said. "This quarter's earnings reflect strong performance from our U.S. businesses," he said, adding that the operation "continues to generate healthy organic growth in commercial loans and is executing against its plans."

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