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Bank of Montreal said Tuesday fourth-quarter profit rose 11 per cent. The bank also raised its dividend.

Fred Lum/The Globe and Mail

Canada's six largest lenders defied the odds in 2016, with fiscal-year results substantially stronger than many feared they would be.

In a year when the Canadian economy was ravaged by plummeting energy prices and a surprise wildfire and when global shocks such as the Brexit vote and the United States election caught investors off guard, the country's Big Six banks hummed along, churning out solid results.

Comparing their earnings year-over-year can be tricky, because they have all endured large restructuring charges in the past 24 months, which boost expenses. But this year, revenue growth from the Canadian personal and commercial banking arms, which dominate their profits, averaged 4.6 per cent – a victory considering underlying economic growth was anemic.

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Canadian banks largely credited their earnings mix for their continued strength. "We think the diversification is underappreciated," Bank of Montreal chief financial officer Tom Flynn said in an interview. The different businesses within a bank often complement each other, so even if one is struggling, others counteract the weakness.

Looking forward, the odds are stacking up against the banks again next year – albeit in different ways. Regulators have forced lenders to be even more conservative with their capital, which limits how much money they can invest in their businesses.

There is also uncertainty about the extent to which new federal mortgage rules will calm overheated housing markets in Toronto and Vancouver. Housing loans have boosted bank bottom lines for many years now. But many times since the Great Recession, Canada's banks have predicted they'd have a tough time repeating their successes and they've proven themselves wrong.

Investors don't seem very worried. Five of the Big Six bank stocks have set record highs in the past month – three on Tuesday alone – and are now trading around their historical peaks.

In fiscal 2016, the tale of bank profits is a two-part story. In the first half of the year, many banks endured energy loan losses and investors panicked about exposures to the sector, despite lenders' assurances that they could handle a storm.

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Optimism returned in the second half of the year, thanks to a partial rebound in energy prices and to solid earnings.

BMO capped fourth-quarter results Tuesday with a profit that handily beat expectations. Quarterly net income hit $1.35-billion, up from $1.21-billion a year ago. Adjusted for one-time items, earnings were $2.10 a share, well above analyst expectations of $1.85.

The bank increased its quarterly dividend by two cents to 88 cents a share. For the full fiscal year, BMO earned $4.63-billion, up 5 per cent from 2015.

BMO's capital markets division served as its profit driver in the quarter, with earnings up 65 per cent to $396-million from a year ago. Gains came almost across the board, with better revenues in everything from mergers-and-acquisitions advisory activity, to equity and debt underwriting, and equity and interest-rate trading.

Canadian personal and commercial banking, which delivers the lender's largest profit, had earnings grow 5 per cent in the quarter, driven by solid loan and deposit growth. In wealth management, which includes the bank's insurance division, income jumped 15 per cent, owing to strong operating growth.

Results in BMO's U.S. personal and commercial banking arms were encouraging. For multiple years after BMO bought Marshall & Ilsley in 2010, returns from this unit weren't significant, in large part because the U.S. Midwest struggled to deliver economic growth after the Great Recession.

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Profit in that division is now improving, with income hitting $286-million last quarter, up 38 per cent from a year ago. Some of those gains were fuelled by BMO's acquisition of General Electric's transportation financing business in the United States.

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